Europe's central banks will be left with a stonking pounds 144bn in spare foreign exchange reserves once they've stocked up the new European Central Bank's coffers, following the planned introduction of the euro in 1999.
The central banks of Germany, France, Austria, Belgium, Luxembourg, Ireland, Italy, Spain and the Netherlands will contribute 50bn euros (pounds 31bn) that will get the Euro- pean central bank up and running.
The banks then have a choice. They can either invest the remainder in order to spread their risks and make some money, or pay down debt and help cut their governments' budget deficits. Or they could opt for a combination of the two. But for now, they're not saying which line they'll take. "We're discussing this intensively, but nothing has been decided," said Jan Paul Korthals Altes, a spokesman for the Dutch central bank. "The formal decision will be taken when the European central bank is founded." The introduction of the euro will overnight translate what are foreign exchange reserves - held in deutsch-marks, French francs, Belgian guilders and so on - into Europe's newly minted domestic currency, the euro. The money will still belong to the central banks, although because it's no longer foreign currency, it can't be used to defend the new national currency of Europe. Buying euros with euros serves no purpose if the euro comes under attack from speculators. Some central banks are already preparing for the change. The Austrian National Bank, for example, has been shifting more of its funds into dollars over the past two years, said the bank's Gerald Husa. "We're not going to say what our portfolio is because we're market participants," he said. "We'll keep our reserves after EMU." German Bundesbank officials said it would hold its reserves in dollars - as it does now. Other central banks declined to comment on how they plan to deal with reserves after 1999. Compare those excess funds (equivalent to $230bn) to the $31bn in foreign exchange reserves held by the Federal Reserve for the US, the world's largest economy, and you're looking at a huge amount of cash held by central banks, no longer needing to defend their individual currencies. "To the extent that reserves are held as a tool for foreign exchange policy, they won't be needed," said Paul Megyessi, senior currency strategist at Deutsche Morgan Grenfell. "Their role will change from conducting monetary policy to investment management." As Europe's central banks try to spread their investments in a world which has only three major reserve currencies - the euro, dollar and yen - they're likely to increase their holdings in markets which are less affected than others by shifts in the world's three biggest economies. …