By John O’Donnell and Francesco Canepa
FRANKFURT, Nov 30 (Reuters) – A debt meltdown at Swedish property group SBB has left the European Central Bank at risk of losses and highlighted the 26 billion euro ($29 billion) exposure it has built up to current Europe. stricken real estate sector through its crisis-era bond buying.
A Reuters analysis of ECB records shows it owns two euro-denominated bonds issued by SBB, which has amassed debts of more than $9 billion by buying properties, including social housing, government offices, schools and hospitals.
Two sources familiar with the matter said the ECB’s SBB bonds totaled several hundred million euros. One SBB bond now trades at about half its face value, showing that investors have priced in some risk of a potential debt default.
When SBB, what is now waste-ratedrecently bought back bonds at a small discount to stabilize its finances, the ECB was among the sellers, one person familiar with the matter said.
An ECB spokesman declined to comment on SBB or any losses incurred, pointing to its website where the central bank generally characterizes its losses as “side effects” and says it can dip into large profits from recent years to offset them.
Although SBB represents a small exposure for the ECB, it reopens a debate about how the eurozone’s central bank has splashed nearly 400 billion euros on corporate debt since 2016 as part of a huge asset push to stave off the threat of deflation.
In total, it has spent about 5 trillion euros on government debt, corporate bonds and other assets that it typically holds to maturity.
However, as early as 2016, the ECB warned of a real estate bubble in parts of Europe, while at the same time buying bonds in real estate in the region under the scheme.
“It is difficult to understand how the ECB ended up buying the bonds of real estate companies while at the same time warning about the risks of property price inflation,” former ECB chief economist Otmar Issing told Reuters.
“It contributes to inflating the bubble, while risking its reputation as well as financial losses,” he added.
As well as the SBB bonds, the ECB holds debt in other proprietary companies across Europe, including in Germany and Swedenthe countries worst hit after the steepest interest rate hikes in the euro’s history have stung real estate, which has been inflated by a decade of virtually free money.
SBB’s problems have been known since early 2022, when it was targeted in a critical report by short seller Viceroy Research.
“They (the ECB) should have applied … active risk management,” said Daniel Gros, director of the Institute for European Policy at Bocconi University in Milan.
While the ECB outlines the parameters of its bond buying, it does not say how much it bought, at what price or detail any losses. But data this week show the central bank still held the two bonds issued by SBB as of November 24.
In the event of a default by SBB, the 20 national central banks of the euro zone, which share the risk for corporate bonds bought on behalf of the ECB under its Corporate Sector Purchase Programme, would have to take a small loss if it still owned the debt it bought mid 2021 and early 2022.
“SBB needs to reduce its debt further but has taken important steps … having repaid 2 billion euros in debt in the last 15 months,” a company spokesman said.
buying ‘BLIND’
Borrowers from Europe and beyond used the ECB scheme, under which any company, bar banks, qualified as long as its debt was in euros and issued by a eurozone entity with an “investment grade” rating from a major agency.
“The goal was to lower borrowing costs in the euro area and you don’t do that by buying the bonds of a Swedish company,” Gros said, adding that the ECB “blindly” followed its rules, without taking proper precautions.
While Sweden is not in the eurozone, SBB issued the debt bought by the ECB in neighboring Finland, which is.
Alongside the SBB bonds, the ECB also floated the debt of other real estate companies that later ran into problems, including Sweden’s Heimstaden.
Both were downgraded in recent months by Fitch Ratings, which said they were among a number of European real estate companies facing “debt maturity walls” in the next 12 to 18 months.
The ECB owns eight Heimstaden bonds, issued by an investment-grade unit of the group, including one that trades at a discount of around 40% to its issue price.
Heimstaden told Reuters that its finances were sound, that its focus was on “strong liquidity” and investing in its bonds was low risk.
The ECB also swallowed many German real estate bonds, including 39 issued by Vonovia, which sold properties to cut debt. The bonds are trading much closer to par, one at a discount of around 20%.
Real estate makes up 8% of the ECB’s Corporate Sector Purchase Program, which is now worth €326 billion. The ECB does not disclose the composition of its other, pandemic-era bond buying scheme.
The central bank has suffered mishaps in the past, such as when it made a loss on scandal-hit bonds South African retailer Steinhoffand posted losses last yearprompting concern that its capital cushion could shrink.
The ECB outlines several lines of defense against losses, such as staggering them over several years or asking national central banks to splurge.
But the Dutch national central bank warned that it might need a capital increase from its finance ministry, which would likely anger taxpayers and raise questions about its independence from politics.
“When central banks make losses, it’s ultimately a loss for the government, which means the taxpayers have to pay,” Gros said.
($1 = 0.9117 euros)
($1 = 10.3532 Swedish kronor)
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(Alexander Smith Edition)
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