Due to the drop in the market value of state bonds in which state money was invested, the Central Bank of Montenegro has losses on that basis – at the end of May this year, they amounted to 39.5 million euros. Compared to the end of last year, the losses are slightly smaller – then they amounted to 48.2 million, because in the meantime there was a change in bond prices on the market.
The CBCG stated that they have the money to cover this loss, but in that case their core capital would fall below the legally prescribed minimum (€50 million), which is why the provision on compensation of the core capital deficit from the state budget would be activated.
In order to avoid the scenario that the money on this basis is compensated from the state budget, with the amendments and additions to the CBCG law that the government recently adopted, a temporary solution was proposed that these losses for the year 2022 are not covered, but kept in the account of unrealized revaluation reserves until the moment of their sale.
This solution was proposed after consultations with other central banks, the International Monetary Fund (IMF) and external auditors.
The CBCG, headed by Governor Radoje Žugić, stated that during the past year there was a sudden change in conditions on the financial markets and a large drop in the market prices of securities, as a result of the long-term negative effects of the pandemic, the crisis caused by the war in Ukraine and the normalization of monetary policy in towards an unexpectedly aggressive increase in interest rates.
“The previous long-term period of negative interest rates imposed a situation where most institutional investors, including the CBCG, invested in a part of their investment portfolio in bonds with a longer maturity, but with a significantly better credit rating. The sudden rise in interest rates affected the decline in the market value of bonds (given that bond prices are inversely proportional to the yield attached to them), and this situation caused large-scale unrealized losses on bond portfolios of all categories of investors, including central banks”, said the CBCG.
The supreme monetary institution of Montenegro stated that the American Federal Reserve (Fed) had unrealized losses in the amount of 673 billion dollars. The Swiss National Bank posted unrealized losses of $143 billion, representing nearly 18 percent of Switzerland’s gross domestic product (GDP) and what analysts believe may be the biggest one-year loss ever recorded by the central bank.
As they further state, the unrealized losses of the Bank of England amount to more than 200 billion dollars, which will result in payments from the British treasury to the Bank in the next decade which are predicted in the total amount of almost 230 billion pounds, or about ten percent of the national GDP.
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