While The ECB Starts A 'War On Cash', European Citizens Start Hoarding!

ECB Headquarter

The European Central Bank has shed some more light on its operations in 2015, the year wherein it decided to forget about the free market economy as the bank has become one of the main market participants now.

The Central Bank’s net income from the asset purchase program increased from 2M EUR to 161M EUR, and the asset purchase program was responsible for the 9.4%  increase in the net profit of the bank. Indeed, the ECB has made a very handsome profit of almost 1.1 billion Euro, which was distributed amongst the national central banks in the Eurosystem.

ECB Balance sheet size

Source: ECB

What’s more important is the fact the size of the balance sheet of the ECB is increasing again. At a very fast pace! The total value of the balance sheet of the Eurosystem was 2.8T EUR as of at the end of 2015 (which is approximately $3.1 trillion). That’s a substantial increase compared to just 2.4 trillion last year, and there are no signs of seeing the expansion of the balance sheet slowing down as not only will the ECB continue its asset purchases, it’s even considering to expand its monetary easing program by stimulating the markets even more.

At the same time, the war on cash has started, and several officials and market participants have claimed the bank notes of 500 EUR (and even 200 EUR) should be banned, whilst for instance in the USA, Larry Summers wants to get rid of the $100 dollar bill. It’s understandable the governments are getting nervous about the force of people drawing down cash and hoarding their cash (and other assets) outside of the traditional banking system. Perhaps the next chart explains everything in just one powerful image.

ECB Balance sheet Notes

Source: yardeni.com

The total amount of bank notes has increased by 57% since the end of the global financial crisis, and this really is an indication the European citizens still don’t trust financial institutions with their assets. It’s truly remarkable to see such a sharp (and steady!) increase of the total amount of bank notes in circulation and it’s totally understandable why this makes the monetary powers ‘nervous’.

Portugal ECB

Source: Santander presentation

On top of that, the situation in for instance Portugal seems to be deteriorating once again. The country has been trying to convince the European Commission and the ECB it knows what it’s doing and that it has a plan to get the country back on the right track, but apparently that’s not what the ECB-team saw in Lisbon. The mainstream media seems to have fully ignored this report, but we feel this could be an important problem as it seems to be just a matter of time before Portugal will need a new bail-out.

While the authorities have committed to comply with European budgetary rules, the effort to reduce the underlying structural budget deficit needs to be significantly increased. […]The adjustment in the underlying structural deficit in 2016 reflects an insufficient consolidation effort. […]Banks continue to consolidate their balance sheets, albeit at a slower pace than previously observed, and have seen minor improvements in profitability. […]high levels of non-performing exposures continue to weigh negatively on profitability and capital.

This doesn’t really make us feel comfortable at all, and as the European economy still isn’t improving, Portugal might have to beg the institutions for more cash.

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