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The ANFA debate: No evidence of monetary financing

Press Release of March 29, 2016

Greater transparency of the national banks of the euro area would strengthen Eurosystem credibility.
The allegation that the European Central Bank (ECB) is engaging in illegal monetary financing under the guise of ANFA (Agreement on Net Financial Assets) seems to be unfounded—there is simply no evidence for it, claims the German Institute for Economic Research (DIW Berlin) based on their analysis of the national central banks’ balance sheets. But because the data do not clearly refute this accusation either, DIW economists Kerstin Bernoth and Philipp König are advocating for greater transparency: “The fact that the general public has become suspicious of the motives behind the national central banks’ actions carries the risk that monetary policy in the euro area may lose its most important asset: its credibility.”

ANFA prevents conflicts with the single monetary policy

The national central banks are responsible for monetary policy operations in the euro area, as well as a number of domestic tasks, including the management of their portfolios. To ensure that this does not conflict with the single monetary policy, the ANFA stipulates a ceiling for the net financial assets in the national central banks’ balance sheets—that is, the net total of assets unrelated to monetary policy or unaffected by payment transactions or reserve requirements.  

Earlier this year, the ECB disclosed the previously confidential agreement following a public debate and accusations that illegal monetary financing of fiscal deficits may have taken place through ANFA purchases. Monetary financing occurs when a euro-area central bank makes credit directly available to a member state or when it acquires a member state’s bonds directly on the primary market. However, purchases of government bonds on secondary markets or their acceptance as collateral to secure refinancing credit do not fall under the prohibition.

Strong expansion of government bond holdings

Since 2003, national central banks in the European System of Central Banks have expanded their government bond holdings. A substantial part of this change over the past six years is likely due to the large-scale asset purchases under the umbrella of unconventional monetary policy measures. And even though the items on national central banks’ balance sheets where government bond purchases under the ANFA are usually recorded have also increased in recent years, this is not enough to confirm the existence of covert state financing. For one, central banks also hold sovereign debt for balance sheet and portfolio management; furthermore, it is not apparent from the published balance sheet figures which central bank holds government securities from which countries. Currently, the only institution that has detailed insight into the national central banks’ individual transactions involving net financial assets is the ECB, which monitors the government financing prohibition. The ECB has only reported one recent case where there were signs of illegal securities purchases (in Ireland).
According to Bernoth and König, “From the outside, it is difficult to understand the central banks’ motives and strategies with regard to their bond purchases. Here, a greater transparency on the part of the national central banks when it comes to the composition of their investments would certainly be appropriate.”