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German Central Bank Doubles Reserves

Germany's central bank said Tuesday that it nearly doubled the reserves it holds to cover possible losses, in a not-so-subtle expression of its uneasiness with emergency measures the European Central Bank has taken to combat the euro crisis.

The Bundesbank said it raised its risk provisions, money it sets aside to cover losses such as a default on euro zone bond holdings, to 14.4 billion euros, or $18.7 billion, from 7.7 billion euros a year earlier. The bank's profit for the year, which it transfers to the German government, was little changed, rising to 664 million euros from 643 million euros.

Jens Weidmann, the Bundesbank president, said the increase in loss reserves "takes appropriate account of the risks on the Bundesbank's balance sheet."

But the decision to set aside further billions may also be interpreted as a verdict by Mr. Weidmann on the European Central Bank's measures he has long criticized, such as purchases of Italian and Greek government bonds to try to keep those countries' borrowing costs under control.

Mr. Weidmann, a member of the European bank's governing council, has played the role of Cassandra as Mario Draghi, the bank's president, has led a vast expansion of the central bank's powers.

Fears the euro zone will crumble have receded since Mr. Draghi promised last year to buy bonds of troubled euro zone countries to contain their borrowing costs. But Mr. Weidmann has often complained that the E.C.B. has gone too far, endangering its independence from political leaders and its mandate to guard price stability above all else.

On Tuesday Mr. Weidmann repeated his contention that the best solution to the euro zone crisis is for countries to get government spending under control and improve the performance of their economies. He said that relative calm on financial markets was due not only to bank policy, but also to progress by political leaders.

"The reduction of tension on financial markets should by no means lead to neglect of the necessary structural reforms," Mr. Weidmann said in a statement.

The Bundesbank decision to bolster its reserves may also reinforce fears among Germans that their money is at risk because of European bank policies designed to keep the euro zone from falling apart. The Bundesbank is one of Germany's most respected institutions, widely regarded as a bulwark against less prudent members of the euro zone.

Since 2010 the E.C.B. has acquired bonds from troubled euro zone countries valued at 209 billion euros, with Italian government bonds accounting for nearly half of that amount. In an attempt to encourage lending to businesses and consumers, the E.C.B. has also vastly expanded the collateral that commercial banks can post in return for cheap central bank loans.

The 17 national central banks in the euro zone, which carry out much of the work involved in running a currency union, would share the losses if a country were to default on its bonds or if collateral posted by a bank were to lose value.

Among Germans, there is widespread fear that Germany would bear much more than its share of the cost if the euro zone fell apart. The Bundesbank acts as the clearinghouse for large transactions in the currency zone, and other central banks have what amount to large overdrafts.

At a press conference to present the Bundesbank's annual results, Mr. Weidmann repeated warnings that France was slipping behind because of its failure to make economic reforms. But he acknowledged that E.C.B. policies had not yet led to an increase in inflation.

"In the short term, we in the euro area have, if anything, declining inflation risks," he said. Mr. Weidmann also said the German economy was in good shape.

The Bundesbank, like other central banks in the euro zone, continues to do much of the day-to-day work of the euro zone, including making sure there is enough money in circulation, storing gold reserves and acting as go-between for large payments between commercial banks.

Its activities generate interest income, which totaled 11 billon euros last year, up from 8.6 billion euros in 2011. The Bundesbank's profit, however, has plunged 90 percent since the financial crisis began in 2008, as the bank set aside ever larger sums to cover risk.

[Source: By Jack Ewing, The New York Times, Frankfurt, 12Mar13]

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