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Central bank balance sheets explode to € 6000 billion Financial

That amount is more than half of the gross domestic product of the eurozone, De Nederlandsche Bank (DNB) announced on Monday. DNB’s balance sheet has also grown to more than a third of the Dutch economy.

DNB is part of the Eurosystem, which is the national central banks of the eurozone together with the European Central Bank (ECB).

Interest rates down

As a result of ECB intervention, the financial markets have stabilized and interest rates have fallen back to pre-crisis levels, DNB writes. Interest rates are being pushed down by the ECB’s loose policy. Euro area governments need to raise additional money to pay for all corona measures.

To ensure that those debts remain affordable, the ECB has been buying up additional bonds since March. Until the end of the year, the ECB will purchase € 1350 billion in bonds.

In addition, there is also a new package of cheap loans for banks. Banks can borrow money cheaply from the ECB, with the intention of lending it back to companies. “For example, a record amount of credit has been extended in the euro area in the past months of this year.”

DNB says that the balance sheet of the joint central banks has now risen so high that it is not ‘unique’. In earlier crises, such as major recessions and wars, the balance sheets of central banks in the United States, Japan and the United Kingdom, among others, increased.

Side effects

But DNB does emphasize that these must be temporary measures, otherwise that broad policy will have all kinds of unpleasant side effects. Buying bonds means that interest rates are going down, so there is much less pressure on countries to reform or not to let government debt run too far.

DNB President Klaas Knot is one of the critics of the ECB’s policy within the Eurosystem. Under previous ECB president Mario Draghi, a lot has been done to keep the eurozone together after the previous crisis. However, that support has hardly been reduced, even if the eurozone economy grew again.

Read an interview with Klaas Knot in which he criticizes the ECB:

As a result, the ECB had less clout when the corona crisis erupted. Interest, one of the main instruments of a central bank, was already below 0%.

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