Eurozone central banks will report their first significant losses in a decade of money printing in the coming weeks. The results will turn negative for many banks as early as 2022 due to the mismatch of interest rates on assets and liabilities. Financial institutions finance themselves at higher interest rates, which do not correspond to the bond yield level held by central banks.

The plumbing no longer holds up in a context of high debt and, at best, an economic slowdown. These losses foreshadow tax increases in the eurozone at the worst of times. Indeed, the lender of last resort will not go bankrupt. However, the bank’s rules related to compliance with specific financial ratios could force national governments to refinance their central banks.

At the current level of rates, the Bundesbank could lose 26 billion euros in 2023. This would cancel the 20 billion euros of provisions for losses on the asset purchase programs and its reserves. For a traditional financial institution, this could mean insolvency. If rates remain high in 2024, the Dutch and French central banks are also at risk of having negative equity. Last September, the head of the Dutch central bank, Klaas Knot, warned his government of “accumulated losses which will be considerable” in the years to come. “In an extreme case, a capital contribution” from taxpayers “might be necessary,” he added.

In the medium term, these drifts, which could significantly impact the economy, are likely to endanger the independence of central banks. The losses come because the ECB created liquidity by buying 5 trillion euros of government bonds primarily to fuel inflation and stabilize financial markets during the pandemic. Much of these funds are returned in the form of deposits. The national central banks remunerate them at the ECB rate, now 2.5%. The corresponding assets are fixed coupon bonds paying only 0.5% on average.

Although the ECB makes monetary decisions, operations are conducted nationally. The Bundesbank is the most affected as German government bonds were seen as a haven, with low or negative yields. On the opposite, the Bank of Greece, whose purchases were much smaller and of higher-yielding domestic bonds, should remain profitable.