Monetary authorities: The Bundesbank will continue to make losses for years to come

If there is one institution that people associate with the much-vaunted "good old days" in Germany, it is probably the Bundesbank . There has rarely been bad news from the monetary authorities. But now the Bundesbank has to report a double-digit billion-euro loss for 2024. The deficit amounts to 19.2 billion euros. Red figures are also expected for the next few years, although not as deep red as now. "The peak of the annual burdens has probably been passed," said Bundesbank President Joachim Nagel on Tuesday when presenting the annual financial statements.

The last balance sheet loss of the monetary authorities dates back to 1979, when dollar reserves had to be revalued. This time it was due to the toxic mixture of loose monetary policy and bond purchases during the years in which Mario Draghi was ECB President. Added to this was the rapid rise in key interest rates from 2022 to the beginning of 2024. Last year, the Bundesbank had therefore already reported the highest loss in its history at 21.6 billion euros, but this shortfall could still be offset by the release of loss reserves. For the Bundesbank, this was and is the price to be paid for the "right monetary policy", as Nagel said.

After Sunday's general elections, the Bundesbank President is putting pressure on the government to form a coalition quickly. "Germany needs an effective government as soon as possible." There is no significant economic recovery in sight. "A third year without recovery cannot be ruled out," said the Bundesbank President. Germany's economy has been in recession for two years and is currently discussing how the necessary investments can be paid for. A reform of the debt brake is also being discussed. The Bundesbank plans to present a reform proposal at the beginning of March. "We want to anchor the stability instrument in it, but also create more scope for possible future investments, for example in the defense sector," said Nagel. "We are in a different environment than 15 years ago, when the debt brake first saw the light of day," said the Bundesbank President. He sees it as the Bundesbank's duty to make this proposal and calls on politicians to "read it carefully."

It is rare for monetary authorities to interfere in politics in this way - and it underlines the seriousness of the situation Germany is in. The Bundesbank is supposed to be politically independent in order to concentrate on its core task of fighting inflation. But Nagel will leave no stone unturned to get central bank authority into parliament: "It's five minutes to midnight," he said. Nagel believes that Germany will be able to finance the tasks through the national budget, and he does not believe that a mutualization of debt at EU level is necessary.

The Bundesbank will continue to accumulate billions in losses in the coming years. But this is more due to bad luck than to poor management. In view of the rising inflation rates, the ECB raised the key interest rates from zero to four percent from July 2022. Four percent that the central bank had to pay to the commercial banks on their excess reserves , which have been in the central bank's current accounts since the euro debt crisis.

Looking back: Under the leadership of the then ECB President Mario Draghi, the Euro system launched a trillion-dollar bond purchase program in 2015 to stabilize the banking system. The Bundesbank bought German government bonds from the large commercial banks and credited the purchase price to the banks' current accounts at the central bank. In return for this money, the banks receive income at the base interest rate level. Although this has now fallen back to 2.75 percent, the interest payments due are still higher than the income the bank generates from government bond purchases.

This means that the next federal government cannot expect any money from the Bundesbank, even if profits are generated again soon. This is because the aim is to use these surpluses to gradually reduce the billions in losses that have accumulated by then. "Profit distributions to the federal government are not on the cards for a long time," said Nagel.

Apart from the current losses, however, the Bundesbank has a solid balance sheet, as it has valuation reserves of 267 billion euros in its gold holdings. This amount is many times higher than the current and expected balance sheet losses. Historically, the Federal Ministry of Finance was able to plan an average annual Bundesbank profit of 2.5 billion euros; in 2019, it was even 5.9 billion euros. This was the last distribution to date, as the profits from subsequent years had already been set aside as a loss buffer.