The Corner

Targets, A Horror Story?

There’s a target in the sights of anxious Germans, and it’s called Target2.  Early last month, I linked to a piece by  Ekathimerini’s Nick Malkoutzis that outlined how this worked. The key point was this:

When a depositor in a peripheral economy moves their funds to a bank in another eurozone country, the payment is processed through the eurozone’s settlement system, creating a claim between the national central bank of the peripheral lender and the rest of the Eurosystem.

And if money started pouring out of the euro zone periphery into safe havens such as Germany?

[T]he claims between peripheral central banks and those in core eurozone countries would build up to potentially worrying levels. It was reported that by January the Bundesbank’s total exposure was already more than 500 million euros. [A] letter  [from Bundesbank President Jens Weideman] to Draghi confirmed Germany’s concern about this development. He suggested that either the Frankfurt-based bank accept better collateral or for peripheral central banks to provide their own collateral to the ECB, which would give the Bundesbank a claim on Greek assets, as well as those of other countries. “He might as well have suggested sending in the Luftwaffe to solve the eurozone crisis,” wrote Financial Times commentator Wolfgang Munchau. “The proposal is unbelievably extreme.”

Well, money has been pouring out, and those claims between central banks are building up. As Bloomberg News recently reported:

In the seven months through February, the relevant debts of the central banks of Spain and Italy increased by 155 billion euros and 180 billion euros, respectively. Over the same period, the central banks of Germany, the Netherlands and Luxembourg saw their corresponding credits to other euro- area central banks grow by about 360 billion euros.

The seven-month increase is about double the previous 17- month rise, and brings the three safe-haven countries’ combined loans to other central banks to 789 billion euros, their highest point on record. In essence, the central banks of the three countries — and, by proxy, their taxpayers — have agreed to make good on about 789 billion euros that were once the responsibility of Italy, Spain, Greece and others.

And those taxpayers are getting agitated. The Daily Telegraph’s Ambrose Evans-Pritchard reports:

Critics say Target2 allows the vast sums to pile up for ever, unlike the US “FEDwire” that mandates the settlement of regional imbalances within months. The Target2 saga has become a daily theme in the German press…The coverage is eroding confidence in the euro. The latest poll shows that 56pc of Germans want a return to the D-Mark.

If you read the full  piece you can see that there is a debate about how much of a problem Target 2 could  be, and under what circumstances, but nevertheless…

Some of the more cynical eurocrats, however, might say the bigger the problem it is, the better.  To understand why, check out this earlier piece by Mr. Evans-Pritchard, and, in particular, this:

If [the single currency zone] holds together, the credits are just an accounting detail. Any loses would be divided between the family of central banks, so even a Greek exit could be managed. But if Germany leaves, those claims would be difficult to enforce, or even unenforceable. The German taxpayer would face very large losses. Ergo, the longer this goes on, the longer the Target2 imbalances build up, the harder it is for Germany to extract itself from the euro.

As one German banker told me, Target2 is the ring through Germany’s nose. It ropes the cash cow.

Escape is not to be on the agenda….

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