Crisis not over, Bundesbank warns as it ups risk provisions

The eurozone debt crisis is not yet over, even if calm appears to have returned to the financial markets, the Bundesbank warned on Tuesday as it set aside billions of euros in new risk provisions.

“Even if reform policies are kept to, the necessary adjustments in the crisis countries are still going to take years,” the head of the German central bank, Jens Weidmann, told a news conference.

“The growth rates seen before the crisis, which were partially artificially inflated, will not be achievable for a long time,” he said.

Weidmann also complained that policymakers in some countries still lacked a clear direction.

“The reform process has stalled in France; in Italy, the elections have cast a question mark over it; and the situation in Cyprus is even less clear,” he said.

“The crisis is thus not over, despite the calm that has returned to the financial markets in the interim,” the central bank chief insisted.

Turning to Germany, Europe’s biggest economy which has managed to escape the recession that many neighbours still find themselves in Weidmann said: “the German economy was still in good shape despite the difficulties in many European partner countries.”

Nevertheless, the long-running crisis “represents the most significant risk for the economy in Germany,” Weidmann warned.

“Only some of the confidence lost as a result of the crisis has been recovered so far,” he noted.

As the year progressed, growth could be expected to become stronger, but this would depend on the absence of further shocks to confidence, he argued, insisting that it was up to politicians, not Europe’s system of central banks to solve the crisis.

The Bundesbank’s net profit for last year rose only slightly from a year earlier, because the central bank had decided to set aside billions of euros more in risk provisions, Weidmann continued.

The bank’s 2012 net profit amounted to 664 million euros ($864 million), compared with 643 million euros in 2011.

The entire amount which is less than half the 1.5 billion euros that Finance Minister Wolfgang Schaeuble had been hoping for was transferred to the federal government.

“Despite significantly higher interest income, there was scarcely any rise in the profit owing to a further steep increase in risk provisioning,” Weidmann said.

Interest income is a central bank’s most important source of income and net interest income rose to 8.3 billion euros last year from 4.8 billion euros a year earlier.

“The steep 3.5-billion-euro rise is due mainly to strong balance sheet growth on account of the crisis,” Weidmann said.

The central bank boosted its provisions for general risks, including inflation and exchange-rate risks, by 6.7 billion euros to 14.4 billion euros, he said, pointing to “further heightened risks stemming from monetary policy operations in the wake of the financial and sovereign debt crisis.”

As part of its wide armory of anti-crisis measures, the European Central Bank embarked on a controversial programme, known as SMP, to buy up the sovereign debt of countries hit hardest by the crisis.

Out of a total 208.7 billion euros worth of bonds acquired, Italian sovereign debt accounted for nearly half or 99 billion euros.

Spain followed in second place, accounting for 43.7 billion euros of the bonds bought, Greece for 30.8 billion euros, Portugal for 21.6 billion euros and Ireland for 13.6 billion euros.

Weidmann refused to reveal exactly how much of the Bundesbank’s risk provisions covered the bonds bought up under the SMP programme, saying merely it was around “one third”.