Central banks looking to dump negative-yielding
assets in a rapidly depreciating currency could cut the foreign exchange
reserves they hold in euros by a hundred billion dollars or more, analysts
estimate.
The near year-long slide in the
euro and the move below zero of many euro zone government bond yields has
driven a shift by official institutions, among the world's most conservative
investors, on how they manage their $11.6 trillion of FX reserves.
With mostly bearish forecasts on
the euro, analysts expect central banks' euro-denominated reserves to fall
below 20 percent of overall holdings over the coming quarters from around 22
percent.
The latest International Monetary
Fund data show that global FX reserves fell by 3.1 percent, or $383 billion, in
the second half of last year to $11.6 trillion. Around two thirds of that was
due to valuation effects from the euro's 11.7 percent fall in that period,
according to JP Morgan.
The European Central Bank's
commitment to flood the financial system with over 1 trillion euros through an 18-month
long bond-buying program to choke off the threat of deflation has had an
instant and massive impact.
The euro has tumbled towards
parity with the dollar and bond yields across the region have sunk to the
lowest in history, in many cases below zero.
CENTRAL BANKS SELLING BONDS TO
ECB?
Declines in global FX reserves
are rare.
The fall in the second half of
last year was the biggest since the global financial crisis, and the sixth
largest in nearly 50 years, according to JP Morgan.
Most of the last 20 years have
seen a rapid rise in exports from emerging market and oil-producing countries
to the developed world, resulting in huge dollar inflows which have been banked
into FX reserves.
Reasons for the recent shift away
from that pattern include: the plunging oil price, the euro's sharp
depreciation; slowing growth in emerging markets; and many of those countries
drawing down reserves to prop their currencies up against a rampant dollar.
The ECB has so far bought 61.7
billion euros of bonds. It's unclear how much, if any, of that has come from
other central banks as trades would be done via third parties.
Foreign exchange reserve managers
typically hold short-term, low-risk, high-quality assets such as AAA-rated
sovereign bonds, around 2 trillion euros of which currently boast a negative
yield.
But this doesn't necessarily mean
holders of these assets are losing money, as the coupons offered may still
nominally be positive. But the returns are negligible, so it's no surprise some
central banks have had enough.
Click
here to read the original article by Jamie McGeever of Reuters.