Escalation in Euro Rift: Bundesbank Gets Sued

Wolf Richter's picture

Wolf Richter

“Target 2” and its predecessor “Target” used to be a mundane part of the European System of Central Banks (ESCB). Something technical that people didn’t pay attention to. The ECB would borrow money from the central bank of one Eurozone country and lend to the central bank of another Eurozone country, but eventually the transaction would be reversed. In 2008, however, as capital flight from peripheral countries heated up, the credit flows became one-sided and mushroomed with each new outbreak of the debt crisis. It was the first de facto bailout.

Now, the credits extended to the central banks of Greece, Ireland, Portugal, Spain, and Italy exceed €800 billion ($1.05 trillion), of which €635 billion is owed the German Bundesbank—the largest item on its balance sheet, and 23% of Germany’s GDP. If anything happened to the euro, those claims could be, poof, gone.

The risks had been swept under the rug for years and might have stayed there had it not been for Hans-Werner Sinn, President of the Ifo Institute for Economic Research, which publishes the closely-followed Ifo Business Climate index. It was Helmut Schlesinger, former President of the Bundesbank, who’d drawn Sinn’s attention to the Target 2 balances in 2010. The 87-year old retiree had noticed claims by the Bundesbank to the tune of hundreds of billions of euros against the ESCB ... and couldn't figure out what was behind them. “Since this day, the topic has been dogging me," Sinn said.

As he saw it, if one of the Southern European countries were to leave the eurozone, its debt under Target 2 would be transferred to the remaining Eurozone countries and their taxpayers. Bad enough. But if the euro broke apart entirely, all claims by the Bundesbank against the ECB would evaporate. “Germany could lose half a billion euros,” Sinn said at the time—which now has grown to €635 billion.

He was accused of exaggerating and making gross mistakes in his analysis. The Bundesbank brushed him off, calling the Target 2 claims, despite their magnitude, "irrelevant balances." But late February, everything changed: Bundesbank President Jens Weidmann wrote a letter to ECB President Mario Draghi, warning him of the growing risks within the ESCB. He specifically addressed the Target 2 balances and suggested that security policies be implemented to contain their risks. If some countries defaulted on these debts to the ECB, Weidmann wrote, the rest of the European central banks would have to absorb the losses, which they might not be able to do.

The letter instantly deepened the rift between the ECB and the Bundesbank. And it unceremoniously dumped the reeking pile of Target 2 balances on the government’s doorstep. Now even Chancellor Angela Merkel is supposedly keeping an eye on it. That might have been it. Watchful waiting while everyone is holding their nose, hoping the problem would go away.

Alas, yesterday it emerged that Bernd Schünemann, a law professor at the Ludwig-Maximilian University in Munich, has sued the Executive Board of the Bundesbank, accusing it of perfidy (Untreue) with regards to the Target 2 balances. He cited the work of Sinn, Schlesinger, and others.

"The people in charge must no longer look the other way, given the dimension of the risks," said Brun-Hagen Hennerkes, CEO of the Stiftung Familienunternehmen, a non-profit research and support organization for family-owned enterprises that is backing his efforts. “The Executive committee and the Federal Government shouldn’t have allowed the ECB to do this. They should protect the Federal Republic and its taxpayers from potential damage."

A dilemma. If Germany knows that it would end up holding the bag if the euro broke apart, would it not sacrifice practically anything to keep it together? It might have to because the next President of France will likely press the ECB to take even greater risks and print more money to fund budget deficits directly. Or it could be the last straw. For that debacle, read.... The Big Rift between Germany and France.

And what used to be an academic debate is getting real: now even the IMF said that there were "flaws" in the currency, and that a "disorderly default and exit by a euro area member" could occur. Indeed, with Spain spiraling downward, heading for a crash or an emergency bailout, the IMF finally came to grips with the Eurozone. "A break-up of the euro area could not be ruled out,” it said for the first time. “The financial and real spillovers to other regions, especially emerging Europe, would likely be very large.” Not to speak of the German taxpayer.

And so the IMF is begging for more bailout money. Next occasion is on April 20, when finance chiefs and central bankers of the G-20 hold their shindig in Washington DC. “We certainly need more resources,” explained IMF Managing Director Christine Lagarde, to get the most bankrupt countries to bail out other bankrupt countries. And taxpayers everywhere would foot the bill. Read.... An IMF Absurdity.

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Western's picture

"Germany could lose half a billion euros,” Sinn said at the time—which now has grown to €635 billion."


Surely it's half a trillion euros?

eckart's picture

It's the banks! Always has been...and the Europeans will take them down. In the end, it will come down to the banks vs the EUR....the EUR will out!

Judge Arrow's picture

Bailiff, I think another round of drinks is in order. For the jury.

AUD's picture

What!? The Bundesbank is bust again? Of course it was called the Reichsbank in 1923 & was caught holding the bag of worthless German government debt but that's just semantics.

Nukular Freedum's picture

Just another in a series of outstanding posts Wolf.

bank guy in Brussels's picture

It's not only the Target2 imbalances ... as David Zervos at Jefferies pointed out, in the work extensively cited on ZeroHedge -

The bottom line is that Germany and the northern EU countries lent money to the southern EU countries in order to sell northern products and services ... and in the meanwhile stuffed these dodgy loans onto northern Europe's banks, pension, funds and insurance companies.

In other words, German pensions are now half-'funded' by Spanish and Italian bonds and similar ... so Merkel & co., and northern Europe as a whole, are really in a trap that Germany fostered from the beginning to try to enrich itself.

That is what is missing from the lawsuit against the Bundesbank. Recognising reality means immediately announcing to German and northern working people they only have perhaps half of their future anticipated pension.

Germans can authorise the ECB to print and inflate, to hide from their own workers the fact that their pensions would otherwise be bust ...

Or else there is the option leaked by a French source to Bruce Krasting, also described here on ZeroHedge, the wealthier EU countries, guarantee to cover interest payments and trade deficits for countries like Spain, Italy, Portugal and Ireland ... but NOT bond rollovers ... Instead of repayment of principal, bondholders get 3-year new bonds at EU-determined yield rates, rolled over indefinitely ... yes, technically a 'default' ... and 'breaking' the EU bond market ... but as it seems to be essentially already broken anyway, and given that Germany needs to cover up for all this stuff while keeping the euro afloat ...

The article citing David Zervos at Jefferies on why even the Germans must in the end allow the ECB to inflate:

Bruce Krasting's article on the French government leak as to the EU plan to exit the bond market for the GIIPs countries, as the way to deal with the Spanish-Italian crisis when it boils over:

Ghordius's picture

"The bottom line is that Germany and the northern EU countries lent money to the southern EU countries in order to sell northern products and services..."

Countries? Governments? Or Markets?

As far as I remember it was a big, big wave of bankers telling each other that the eurozone is this and such and everything is safe as houses - just look at the ratings, and the rating agencies know it all, don't they - and all those decisions involved countless banks and pension-fund managers - while the financially ignorant politicians hired other bankers to "extract" even more goodness out of this bonanza.

skipjack's picture

So sick of people pushing the lies...


Inflation is lying about solvency.  Just default already, and stop stealing from the 99%.  Whether you lose it from default, or you lose it from inflation, default is much kinder in the end...and a lot more fair.

Nussi34's picture

So what? It is cheaper to end this nonsense then to extend it with more an more idiotic schemes.

disabledvet's picture

this is a very delicate issue...and should be handled with great care. it was no less than the German President (former?) who said "the use of the military to keep borders open must be considered" when this crisis began. obviously he was talking about the AMERICAN military...and we will not move unless asked to of course. (save for Libya, Egypt, Tunisia, Syria, Lebanon, Iraq, Iran...hmmmm, i'm sensing a pattern here.)

Lednbrass's picture

It would have to be, there isnt a nation in Europe with a military capable of defeating a few dozen kids with slingshots and bottle rockets.

The only thing is can see against that thought is that none of them have any oil, however Romania may still have some production there. If we see news headlines that Al Qaeda has moved into that country, its a definite go.

williambanzai7's picture

635 Billion...mere peanut shells, start the printers Mario.

Reptil's picture

ehm yeah... "fuck" is about right.


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