Is the ECB’s balance sheet in worse shape and “far greater” than the Fed’s? Is the ECB being less transparent than than the Fed? First, is $3.2 trillion on the balance sheet a distinction that makes the ECB a whole lot worse than the Fed’s bloated $2.9 trillion? YGTBSM. More importantly, let’s look at the issue of the quality of assets as a whole and of course the transparency issue.
Below is the ECB’s balance sheet. Look at the top of the asset sheet and notice which item is listed first, and as it turns out what category makes up the largest position on the asset side? Yes, gold. Hmmmm. The ECB marks their gold to market each quarter and lists it as their number one asset. Does the Fed do that? Nope. Our Fed marks its gold certificates to $42 an ounce and those certificates cannot be traded or sold. Therefore they are a dead asset that can never be put into play if needed, and the Fed rightly treats them as dead. On the other hand, the ECB’s gold is real and it is alive, ready to flow, to be sold or added to through acquisition. So, which balance sheet is bolstered by an asset that does not contain counter-party risk? Which central bank is being transparent with what they hold? Better question yet, which central bank holds more debt as a percentage of their total assets? Yes sir, it’s the Fed. Which central bank has more credibility?
C’mon Tyler Durden, you are better than this. The ECB isn’t insolvent, certainly no more than the Fed. They have an ace in the hole that the Fed lacks, gold. As their balance sheet “assets” become increasingly impaired, what happens to their gold position, marked to market? Keep in mind the ECB’s non-gold “assets” are made up primarily from foreign currency (largely the dollar), lending to Euro area credit institutions, and securities of Euro area residents. Any situation where non-gold assets are imploding is constructive to gold. Euro holders will flee to the safety of gold and the value in Euros marked to market will increase to balance the decline in value of non-gold assets.
This process of transferring value from non-gold assets to gold (marked to market) has been underway since the Euro was created. On the launch of the Euro gold represented 30% of the asset sheet and non-gold assets 70%. Today gold makes up 65% of the total reserves on the ECB balance sheet. Believe it or not, there is actually less gold than on the launch due to modest sales. So the actual gold position in tons is smaller, but is valued at far more. Can you think of a reason, Tyler Durden, that this trend will not continue? I know you think gold is going to continue to the moon, you have said so numerous times. Look at the ECB balance sheet and ask what it means for gold to go to the moon? Sorry, the ECB bashing is too easy, I choose to see things differently.
Read more about ECB gold marked to market and implications at FOFOA’s blog here.
ECB’s Balance Sheet Now Far Bigger Than Fed’s, More Levered Than Lehman, PIIGS Exposure Up 50% In 6 Months
While well-known to most, what may be lost on all those calling for the ECB to commence outright printing, is that as today’s Bloodmberg chart of the day shows, the ECB’s balance sheet is not only far greater than the Fed, at $3.2 trillion compared to $2.9 trillion for Ben Bernanke, but at 30x leverage, has the same risk as Lehman did at its peak. However, one major distinction between the Fed and the ECB is that while the Fed continues to be shrouded in almost impenetrable secrecy on an absolute basis, it is transparent as a wet t-shirt competition during Spring Break at Panama City Beach compared to the ECB. From Bloomberg: “Without information on the quality of assets on the ECB’s balance sheet or how far it’s willing to allow leverage to increase, investors may doubt the bank’s ability to prop up the financial system, and demand higher yields to buy some countries’ bonds, he said. “Sovereign spreads could rise again if investors become uncomfortable with ECB leverage without a fully detailed rescue package,” said Tyce. “The ECB is providing liquidity and confidence to the banking system, yet all the while its own leverage and balance sheet size is hitting new highs. It seems likely that the market will begin to watch the rising leverage with interest and growing concern.”
Technically the market should have been watching said leverage long ago, but then again, it is “the market” which lately tends to compete with the rating agencies in how far behind the curve it is. Because where the market may be surprised, is that as think tank Open Europe indicates, “Through its government bond buying and liquidity provision to banks, we estimate that the ECB’s exposure to weaker eurozone economies has now reached €705bn, up from €444bn in early summer – an increase of over 50% in only six months, raising fresh questions about its credibility, independence and possible losses it may face in the case of future sovereign defaults.” Bottom line: the world’s biggest hedge fund – ECB Capital LLC, Onshore Austerity Fund, is also the world’s most insolvent. Which by implication means that when the ECB fails, and it will, it will be up to the Fed to bail it out.