ECB Like Many Hedge Funds Profits from Greek Debt

The European Central Bank (ECB) made over half billion euros from interest on Greek debt last year, according to a report from the Wall Street Journal.

According to the report, the ECB’s net profit increased by 37 percent to € 998 million ($1.32) billion in 2012 compared with its net income in 2011. The amount includes a €555 million interest income from Greek government debt. Based on the annual accounts of the central bank, its interest income from Greek debt declined from € 654 million a year earlier.

Higher income from the SMP contributed to the ECB’s profit increase. The SMP was terminated in September last year, after Mario Draghi, president pf the ECB, announced a new, unlimited bond-buying plan called ‘Outright Monetary Transactions’. The central bank has not made any purchase under its new program.

The Wall Street Journal cited that its the first time for the ECB to provide a breakdown of the bond holdings under its Securities Markets Program (SMP). The program was launched by the euro-zone central bank in 2010 to cut the borrowing costs of struggling governments within the European region. The ECB’s bond-buying program also provides a window, showing gains from its rescue efforts throughout the region’s debt crisis.

Data from the ECB showed that the Italian government was the largest beneficiary of the SMP. The central bank’s portfolio showed that its Italian bond-buying initiative represent a nominal value of €102.8 billion, almost 50 percent of the €218 billion total value of its portfolio.

The Spanish bonds account a nominal value of €44.3 billion, its second largest bond holding and Greek debt account €33.9 billion. Data showed that SMP bonds have an average of 4.3 years left to maturity.

The ECB’s net income from SMP increased from €1 billion to €1.11 billion in 2012. Its income from bonds purchased from its two covered bond programs climbed from €155 million to €209 million.

By the end of December, the ECB allocated an additional €117 billion to offset risks from foreign exchange rate, interest rate, credit and gold price movements. The ECB total risk provision was €7.53 billion. The central bank distributed €575 million of its profit to national central banks last January, and plans to transfer the remaining amount on February 25.

Last December, Dan Loeb’s third Point reported that it gained $500 million from Greek debt. The hedge fund manager made this profits after selling a large portion of its $1 billion position in Greek debt. Loeb bought the debt in late 2012, as earlier reported by ValueWalk. Aside from Third Point, Pharo Macro Fund also gained from its bets in Greek debt. Seth Klarman’s Baupost Group and Paul Singers’ Elliott Associates also profited from the trade.

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