TARGET-2 Imbalances - "The Debt Crisis Is Eating Its Way Ever Further Into Europe's Core"

Tyler Durden's picture

Via Pater Tenebrarum of Acting-Man blog,

As Der Spiegel reports, capital flight from Southern Europe has stopped and even slightly reversed in recent months. This is a belated reaction – so it is surmised – to the 'OMT' announcement effect.

However, the move is still quite small at this stage, although we suspect that several officially unconcerned central bankers in the 'core' are letting out a sigh of relief that their TARGET claims haven't just risen even further.

“As recently as the summer of 2012, investors and those with savings accounts in crisis-stricken countries were moving their money out as quickly as they could. Billions of euros were withdrawn from accounts in Greece and Spain and banks in stable countries such as Germany put a cap on the amount of money they were willing to lend business partners in countries hit hardest by the euro crisis.


But since last autumn, this trend has come to a stop. Indeed, the most recent numbers indicate that a slight reversal is underway, with ECB statistics showing that deposits in Spanish and Greek banks have recently ticked upwards. Furthermore, Germany's central bank, the Bundesbank, reported this week that imbalances in Europe's so-called Target2 settlement system, in which euro-zone central banks and the ECB transfer money across the common currency union, have declined. As the euro crisis progressed, the system had become massively imbalanced, which could result in massive losses for countries such as Germany should Greece, for example, be forced to exit the euro zone.


Just prior to the ECB's massive intervention on the bond markets in August, 2012, the Bundesbank had Target2 claims worth €751 billion ($981 billion). But by the end of December, they had sunk to €656 billion. The imbalance is still dramatic, but the trend reversal provides cause for hope, particularly because it is mirrored by falling debts at the other end of the transfer system. Taken together, the combined Target2 debts owed by Italy, Spain, Greece, Portugal and Ireland shrank from €989 billion at the end of August, 2012 to €902 billion at the end of October. More current data is unavailable.”

Here is the chart that illustrates the situation:


The Bundesbank's TARGET-2 claims versus the TARGET-2 liabilities of the PIIGS as of end October


However, as Hans-Werner Sinn reminds us (Sinn was the first mainstream economist to ring the alarm bell over the growing imbalances in the central bank payments system), the calming of the situation is entirely due to the risks having been shifted, not to the risks having gone away. The ESM with its new power to finance e.g. banks directly, simply shifts more of  the risk to taxpayers residing in the 'core' countries. Quoth Sinn:

“The markets have been calmed because new ways have been found to make taxpayers in those European countries that are still healthy liable," Sinn says. He is not just referring to the bond purchases that could be undertaken by the ECB — purchases that taxpayers are ultimately liable for. Rather, he is also referring to new rules allowing the crisis backstop fund, the European Stability Mechanism, to provide aid directly to banks.


"The debt crisis is eating its way ever further into the budgets of Europe's core countries," he says. "But policymakers are celebrating the obfuscation of this fact as a success."

He certainly has a point.

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Stuck on Zero's picture

As they say: "You can't strengthen the weak by weakening the strong."


Peter Pan's picture

I agree. All you have here is a bunch of termites holding hands to keep a rotten structure upright until the next strong gust of wind.

With such an interconnected world both through communications and markets, it will be one hell of a frightful scenario should things really get to crumble.

This is what governments fear everywhere and the reality is that the already high unemployment figures and weakened economies have little that inspires and even less that will be able to withstand a full scale systemic shock.

Panafrican Funktron Robot's picture

It seems like the weather (controlled/influenced or otherwise) will eventually fuck it all up.  Consider, the total bill for Sandy = the total tax hikes agreed to in the fiscal cliff deal.  And that wasn't even a real fucking hurricaine.

Ghordius's picture

and yet the fist is stronger than five digits alone - or "united we stand, divided we fall"

now it would be really, really interesting to see if that line ever goes back to zero...

Dr. Engali's picture

Assuming that everybody is united in the same goal as those who wield the power.

NoDebt's picture

Youth unemployment in the 25-50% range across the southern European countries (and climbing in both numbers and lattitude)....

I think you hit the nail on the head with "those who wield power".  When that starts to shift, so will everything else, but not before then.  I hear the Nazis are doing quite well in Greece right now.

Watching the current regime desperately struggle to hold it together while boldly declaring "everything's fine here, we successfully squeezed the toothpaste back into the tube" is cringe-worthy.

Winston Churchill's picture

Surely doesn't help if the doctor gets infected by the patients.

I've got to the stage now where I don't believe any figures put out

by anyone anymore.

"When it gets serious you have to lie".

Its way byond serious.

Ghordius's picture

how many have the courage to say "When it gets serious you have to lie"'? just asking

Fish Gone Bad's picture

Certain things are probably best left unsaid.  Nixon's quote: "When the President does it, that means it is not illegal." is Machiavelli at his best. 

"When it gets serious you have to lie"'

That too is indeed true, but it really should not have been said in public.

ball-and-chain's picture

Don't cry for me, Argentina.

You were supposed to have been immortal.

That's all I wanted.

Not much to ask for.

Snakeeyes's picture

You don't say! You mean Greece's 26.8% unemployment rate is caused by excessive spending and debt? Who woulda thunk!

surf0766's picture

It is stable. Understand this. They have spoken.

youngman's picture

The EU is so last week......its Herbalife now...

Ghordius's picture

just wait, now the British finally start to discuss their referendum about leaving the EU in earnest

sbenard's picture

They are simply socializing the bad bets, while creating moral hazard that encourage more risky bad bets. This is only going to get worse!

Thanks for posting this!

yogibear's picture

Obama is modeling the US economy on Europe. Spend to infinity and debt to infinity.


Washington looks to Bernanke and the Federal Reserve to keep buying treasuries.

Infinite Federal Reserve printing and buying debt!!! Infinite print and US debt buying.

Zimbabwe Federal Reserve model.

Raise the stock market and crash the currency.

nantucket's picture

"it's contained"

IamtheREALmario's picture

I suppose that one could look at the creation and distribution of fiat money as a way to distribute a country's balance sheet to the holders of the fiat.

We give dollars to Al Saud and China and eventually they own all of our entire balance sheet. The same applies to Europe.

tango's picture

I am sure that Chinese autocrats have had many a discussion weighing loss of dollar capital vs destruction of their arch-rival.  At what point will they say, "To hell with it" and pull the plug by suddenly selling dollars?  Yes, it would be a tremendous loss for them but on the other hand, their only global rival is now down for the count. 

It's not as if they have to do much.  Mere word that China is dumping dollars would cause a chain reaction.

Bazza McKenzie's picture

That would push down the dollar relative to the yuan and other currencies, making US exports easier and reducing the demand for US imports, including from China.  Bernanke has been busily trying to engineer this anyway.  So exactly how would it benefit China and harm the US?

Bunga Bunga's picture

Btw, Greece received billions from the paymasters end of last year. Of course, this can "reverse" the stream of capital when the money to flee has exhausted. 

From Germany With Love's picture

I have a German term for all of you to memorize: "Ausbrechender Rechtsakt"; it is coming straight from the Bundesverfassungsgericht and refers to an act of European institutions violating the terms under which they have been created aka hav been transferred powers from souvereign European nations to.

In short: Draghi can't do whatever he wants to. He has a mandate and if he was to violate that mandate, the Bundesverfassungsgericht could question the legitimacy of the ECB, even force the Bundesbank out of the ECB system, if push comes to shove.

WIth that in mind and the ECB's overriding mandate of price stability, think about Draghi's lame excuse for OMT (monetary transmission mechanism not working) and his vow to do "whatever it takes". That is like an announcement to break the mandate when and if necessary.

I would call it an admission of intending to commit an "Ausbrechenden Rechtsakt". See you in Karlsruhe, Mr. Draghi.

Whiner's picture

Just make the debt disappear and everything will be groovey again. Puhlease! Make it disappear. Make the lender pay it. That'll work won't it?

falak pema's picture

good let the bubble pop, let the present pay for their crimes. 

THE DORK OF CORK's picture

The core is not strong - it is weak


If they were strong they would have broken up the gaff already - they NEED to extract the PIigs wealth.


Remember the Euro construct is a market state - it is impossible for it to create anything really substancial- it just runs down capital at a ever more efficent rate.

i.e. they suck diesel from Iberia to Germany so that they can make slightly higher profits from capital destruction.



Tompooz's picture

As the liabilities are transferred from the financiers to the taxpayers of core Euroland, the assets of Greece, Ireland and the other PIIGies, will be transferred too.  The frog of sovereignty will be boiled slowly.

JenniferS's picture

Several European countries are already experiencing acute economic problems. It is not obvious why it makes much difference whether these problems are more or less serious than US budget problems. There is little if any relationship to the processes that might reduce or expand either set of problems. But, there seems little doubt that the European problems are more serious than financial problems of millions of people who have to apply for pay day loans with no credit check in order to make the ends meet.