Credit: Central banks head off piste

In recent months several European central banks have started to diversify their portfolios, having traditionally bought only government debt. According to one senior banker, those in charge of the portfolios at the Swiss National Bank, for example, are starting to "go off piste", while others are "certainly considering" moving down the credit curve.

Although central banks have long bought triple-A-rated debt from European and US agencies and supranationals, the recent movement down the credit curve to single-A ratings, with their associated risks, is a significant break from the past. Michael Clack, senior managing director of central bank sales at Bear Stearns, says that "some countries may have already invested in lower credits" than single A, with other market sources saying that Switzerland has already established a small credit fund. Clack says: "In general the investments have not gone significantly down the credit curve as yet". However he does not discount the possibility of a move in the near future. So far sources say that no highly structured credit has been used but, again, they feel that such purchases are not far off.

The Banque de France annual report hints at an interest in corporate purchases by noting that the "stabilization of credit markets" is leading to "better than expected corporate earnings". De Nederlandsche Bank, the Central Bank of the Netherlands, told Euromoney that its non-euro asset portfolio "includes equities as well as fixed-rate instruments" and that it also embarks on "a longer investment horizon". An official at Danmarks Nationalbank says that "it is not our impression that we are taking more risk than other European central banks in our investments", suggesting that all the central banks are becoming more adventurous. Some outside fund managers and experts have been approached to provide guidance.

Mandating fund managers to manage European central bank portfolios reduces the risk of political flak from poor investment decisions. Indeed, the whole question of central bank investments is politically sensitive. The DNB says it "must not invest actively in financial institutions under its supervision" as this "might be perceived by financial markets as signalling future monetary policy decisions". And investing in the securities issued by domestic entities could attract accusations of favouritism.

However, reserves are increasing – up 18% over the past year across the globe – so it is highly likely that more central banks will overcome the dilemmas that investing in credit can present.