The European Debt Bomb Fuse Is Lit! Target2 Imbalances Hit Crisis Levels

Tyler Durden's picture

Submitted by Mike Shedlock via,

Eurozone Target2 imbalances have touched or exceeded the crisis levels hit in 2012 when Greece was on the verge of leaving the Eurozone. Others have noted the growing imbalances as well.

I had a couple of questions for the ECB regarding Target2, which they have answered, I believe disingenuously.

First, we will explain Target2, then we will take a look at various charts, viewpoints, and the email exchange with the ECB.

Target2 Background

Target2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the “Club-Med” countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe.

Pater Tenebrarum at the Acting Man blog provides this easy to understand example: “Spain imports German goods, but no Spanish goods or capital have been acquired by any private party in Germany in return. The only thing that has been ‘acquired’ is an IOU issued by the Spanish commercial bank to the Bank of Spain in return for funding the payment.

This is not the same as an auto loan from a dealer or a bank. In the case of Target2, central banks are guaranteeing the IOU.

Target2 also encompasses people yanking deposits from a bank in their country and parking them in a bank in another country. Greece is a nice example, and the result was capital controls.

If Italy or Greece (any country) were to leave the Eurozone and default on the target2 balance, the rest of the countries would have to make up the default according to their percentage weight in the Eurozone.

Target2 Imbalances


Those numbers are as of December 2016. A check of the Bundesbank Target2 Balance as of January 31, 2017 shows a new record high of €797 billion.

As of December 2016, if Italy were to exit the Eurozone, Italy would owe €356.6 billion to Germany, Luxembourg, and a couple other small creditors.

What’s the likelihood Italy could ever pay back €356.6 billion?

Unpayable debts

Ambrose Evans-Pritchard at the Telegraph notes the unpayable debts then asks Are Eurozone Central Banks Still Solvent?

Vast liabilities are being switched quietly from private banks and investment funds onto the shoulders of taxpayers across southern Europe. It is a variant of the tragic episode in Greece, but this time on a far larger scale, and with systemic global implications.


There has been no democratic decision by any parliament to take on these fiscal debts, rapidly approaching €1 trillion. They are the unintended side-effect of quantitative easing by the European Central Bank, which has degenerated into a conduit for capital flight from the Club Med bloc to Germany, Luxembourg, and The Netherlands.


This ‘socialization of risk’ is happening by stealth, a mechanical effect of the ECB’s Target2 payments system. If a political upset in France or Italy triggers an existential euro crisis over coming months, citizens from both the eurozone’s debtor and creditor countries will discover to their horror what has been done to them.


As always, the debt markets are the barometer of stress. Yields on two-year German debt fell to an all-time low of minus 0.92pc on Wednesday, a sign that something very strange is happening. “Alarm bells are starting to ring again. Our flow data is picking up serious capital flight into German safe-haven assets. It feels like the build-up to the eurozone crisis in 2011,” said Simon Derrick from BNY Mellon.



The Target2 system is designed to adjust accounts automatically between the branches of the ECB’s family of central banks, self-correcting with each ebb and flow. In reality, it has become a cloak for chronic one-way capital outflows.


Private investors sell their holdings of Italian or Portuguese sovereign debt to the ECB at a profit, and rotate the proceeds into mutual funds Germany or Luxembourg. “What it basically shows is that monetary union is slowly disintegrating despite the best efforts of Mario Draghi,” said a former ECB governor.

The Banca d’Italia alone now owes a record €364bn to the ECB – 22pc of GDP – and the figure keeps rising.


Spain’s Target2 liabilities are €328bn, almost 30pc of GDP.  Portugal and Greece are both at €72bn. All are either insolvent or dangerously close if these debts are crystallized.


On the other side of the ledger, the German Bundesbank has built up Target2 credits of €796bn. Luxembourg has credits of €187bn, reflecting its role as a financial hub. This is roughly 350pc of the tiny Duchy’s GDP, and fourteen times the annual budget.

Mish Questions for the ECB – January 27, 2017

Many media reports suggest the growing target2 imbalance in Italy is a sign of capital flight. ECB president Mario Draghi said it was a function of ECB asset purchases. Can you explain why Draghi is right or wrong?


Please also explain the growing target2 imbalance at the ECB itself.



ECB Response – February 15, 2017

Dear Mr. Shedlock,

Thank you for your email and please accept our apologies for the late reply.


The implementation of the APP affects TARGET balances through cross-border settlement of our purchases. For more information on this particular mechanism, please see ECB Economic Bulletin, Issue 7 / 2016 – Box 2: TARGET balances and the asset purchase programme (pages 21-24).


As regards the ECB’s own Target balance, when the ECB purchases securities under the APP, the ECB credits the account of the respective counterparty. Such counterparties are credit institutions, which cannot hold accounts with the ECB, but instead, hold accounts with national central banks. Therefore, payment for a security by the ECB automatically increases the ECB’s TARGET liability (but not necessarily the overall TARGET balance). This is discussed in the Bundesbank’s March 2016 Monthly Report (pages 53-55).


With best regards,

TARGET Hotline

Disingenuous ECB Response

I have been talking about Target2 imbalances for years, and I do not accept ECB’s response straight up.

Euro intelligence also discussed this very question recently. They have it correct, as follows, emphasis mine:

One of the barometers of tension in the Eurozone is the number of articles in the German press questioning the euro’s advantages to the country. The publication of the latest Target2 imbalances is not helping soothe nerves. As of end January, the German surplus was at an all-time record of €796 billion, while Italy’s deficit was at a record €364 billion. The ECB argues that the reason for the gap is not the same as it was during the Eurozone crisis when the imbalances reflected capital flight.


Philip Plickert writes in FAZ that this argument does not tell the full story. It is true, of course, that international banks based in London sell bonds to the Bank of Italy from their Frankfurt-based branches – so that the asset purchases result in transfers of central bank money from Italy to Germany. But why do the sellers not replenish their portfolios with purchases of Italian bonds, shares or other assets? Instead, they take the money and invest in Germany. So this is still capital flight – except that it works indirectly through the asset purchase programme.

Simple Target2 Explanation

Reader Lars writes: “Target 2 is a settlement system. When imbalances arise it’s because transactions are not settled. For example, Luigi in Italy transfers his €1 million from his Monte dei Paschi (MdP) account to his new Deutsche Bank account. MdP does not have the €1 million and has to borrow it from Bank of Italy. The Bank of Italy has to borrow the €1 million from Bundesbank. So at the end of the day, Luigi gets the €1 million into his account in DB but the Bank of Italy now owes €1 million to Bundesbank.”

Do that long enough and this is what happens:

  1. The Banca d’Italia, Italy’s central bank, owes a record €364 billion to creditors, 22 percent of GDPand rising.
  2. The Banco de España, Spain’s central bank owes €328 billion to creditors, almost 30 percent of GDP.
  3. Other nations owe smaller amounts.

Pater Tenebrarum at the Acting Man blog commented via Email “I agree with the eurointelligence view that the steep Italian and Spanish deficits are still a testament to capital shunning various countries. To put it very simply: people managing large sums of Other People’s Money for institutions subject to fiduciary duty continue to have doubts about the euro’s survival, and rightly so.

Reader Lars replied: “It seems to me that the ECB is trying to complicate matters and kick the ball into the tall grass. In regards to the ECBs €160 billion Target2 deficit, it might be the case that the ECB has borrowed from Bundesbank and then lent the money to other national central banks (NCBs) because the Bundesbank has not been willing to do all the heavy lifting itself. Is the Bundesbank shunning risk at local NCBs?”

Rating Agencies Where Art Thou?

The rating agencies should be all over this issue but they are not. Here are two possible explanations.

  1. The rating agencies are in bed with central banks or creditors
  2. They do not understand Target2

Huge Insurmountable Problem

Target 2 is one of the least discussed and least understood problems in the Eurozone.

Jens Weidmann, Bundesbank president, allowed nearly €800 billion in credit to build on his watch. One has to wonder: Is Weidmann moving into illegal territory?

Egon von Greyerz, Founder & Managing Partner, Matterhorn Asset Management AG, made a comment similar to what I have stated many times: “Germany is in bigger trouble than Italy, Spain, or Portugal. Those countries can’t pay so Germany will have to foot the bill.

Alternatively, the Bundesbank and the ECB are going to print money to cover those losses!

Greece alone is unlikely to trigger a crisis now, but Italy, Spain, or France could.

Fuse is Lit

The fuse is lit, multiple fuses actually.

  1. Italy Increasingly Likely to Abandon the Euro
  2. “Italeave” Odds Increase: Rebellion in Italy, Matteo Renzi’s PD Party to Split
  3. French Elections: Another “Unthinkable” Result Coming Up?

Gold’s Reaction

Recent strength in gold is likely based on increasing doubts central banks are once again out of control.

Of course, central banks were never really in control, but appearances matter.

For further discussion, please consider Rate Hike Cycles vs. the US Dollar: Rate Hikes Bad for Gold?

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Bunga Bunga's picture

Dumb Germans will wake up one day with their Euros cut in half.

38BWD22's picture



So many debt bombs out there ready to go bang!

Who will kick it off Europe, USA, China, Japan?

xythras's picture
xythras (not verified) 38BWD22 Feb 26, 2017 5:28 PM

Hey MDB/Little Expired Pizza/Crazy Unicorn, are you also supporting the Women's Strike and it's organizers?

Meet the Convicted Islamic Terrorist and Illegal Immigrant Organizing next Month’s Women Strike

Once a socialist, always a terrorist.

Keep it up like that and sooner or later we'll go Breivik on your collective asses

Sudden Debt's picture

All at the same time because when a country is racing to the bottom faster than another,

they print money and buy bonds from the better performing country and that strenghtens their currency and weakens the other

and that repeats and repeats...

now nobody really knows the real value of the currencies but when they do figure it out, it will be about 50 to 70% lower then it's today. For ALL world economies.

You can't keep hiding behind derivatives also.

Vilfredo Pareto's picture

Are people concerned in Belgium?   Is this on the radar?  

Vilfredo Pareto's picture

Are we placing bets?



xythras's picture
xythras (not verified) Little Lucy Feb 26, 2017 5:12 PM

1 word: PILLS

Vageling's picture

Look you fucking MDB trolls. Your nicknames are telling. Now the little fine persons like yourselves can get stuffed. 

French Bloke's picture

Lilly Allen = white trash traitor

gmak's picture

I think that's what the political elite want in order to "export their way out of trouble".

wildbad's picture

thanks for this excellent tutorial

simplpified version = €U is fucked

Quantum Bunk's picture

Garbage article. Garbage theory.

Target2 imbalances are NOTHING compared to US with the world.


All to cover up the USD problems.

Vilfredo Pareto's picture

I dont think our imbalances can grow faster than world GDP either without consequences down the road.


Both are bad.

cage123au's picture

Well first it was human genocide, now it is economial genocide. Mind you, they are not on their own with that. The world needs to wake up or it is all going to come crashing down SOON in a big way.

Quinvarius's picture

The exact opposite of a falling Euro is going to happen.  I don't think many people have adjusted to the reality of how our system "works" yet.  Exchange rates are not set by the market.  You seem anti-Euro like so many others.  Therefore the value of the Euro will be set higher to give you confidence.  There is no conection between exchange rates, economic activity, or banking soundness.

Vilfredo Pareto's picture

In the short run you are correct.


A serious bout of capital flight due to loss of confidence cannot be papered over or controlled by exchange rate controls. 

finametrics's picture

it all depends on the timeline and who cracks up 1st and hardest.


initially, for saftey reasons, + mechanical jeffrey snider reasons, i think king dollar will lead the way higher, euro dumps. but its possible down the line that this completely reverses and the dollar finally collapses and euro shoots higher (if still alive)

Vilfredo Pareto's picture

That is my guess too.  A short quick burst of hyperinflation, but a haircut on all savings and a big tax surcharge might be less painful.


Then again.  That is like choosing between cancer or a drug resistant infection.   It hardly matters.

Giant Meteor's picture

The fuse has been lit, just getting shorter ..

Dragon HAwk's picture

Nobody on the planet wants to wake up and realize, we have to Screw a lot of Bankers. then come up with a fair method of creating money

Dugald's picture


Keep sharpening many will be required.

Smedley's picture

"Everything is Awesome!"


DirkDiggler11's picture

Nothing that printing more Money won't wash away, just as the US, China, Japan ........ it's a long damn list ,,,

Vilfredo Pareto's picture

Lol.  At some point debt monetization or money printing hits a limit.   Ask Zimbabwe or Venezuela lol

debtor of last resort's picture

Target-2 is like Obamacare for Club Med. I don't need a lot of text to explain a pc-ponzi.

ah-ooog-ah's picture

if you owe the bank 1000 euro, and you can't pay, you have a problem

if you owe the bank 1m euro, and you can't pay, the bank has a problem

if you owe the bank 364m euro, and you can't pay, the government has a problem

LOL123's picture

Nicely written piece in laymans terms...... And the "result was capital controls", says it all.  Thank you.

Batman11's picture

The whole thing was a farce from beginning to end.

The comedy of errors that is the Euro.

How is the system supposed to work?

Bankers are given the privilege of creating money out of nothing for loans which they can charge interest on.

In reality it provides a mechanism for you to borrow your own money from the future and the interest you pay is the charge for this service. You pay the initial sum, plus the interest, back in the future and get to spend that money today on a house or a car or whatever.

This mechanism has an interesting effect on the money supply as the money comes into the economy immediately and is only removed slowly by the repayments. Very slowly, in the case of long term mortgage debt.

For large loans banks set the interest rate depending on the risk assessment of the loan.

Loans to countries are large loans and the interest rate is set depending on the risk of default.

Greece and many Club-Med nations used to have to pay high rates of interest as there was a higher risk of default.

Then The Euro came along.

The ECB was helping Germany get over its bust when the Neuer Markt collapsed by 97%.

The financial sector made an assumption that everyone would be bailed out by Germany if they got into trouble.

Interest rates were set at very low levels across the Euro-zone, due to the incorrect assumption of risk by the financial sector and the ECB’s efforts to help Germany.

The Club-med and Ireland boomed, they had never seen interest rates like these, borrowing was so cheap.

Interest rates in Greece used to be about 18% with the Drachma, it was time to party and stock up on German luxury goods like the Porsche Cayenne, a great favourite in Greece at the time. It was party time in the Club-Med nations and Ireland.

Housing bubbles inflated in Spain, Ireland, Greece and Holland.

Germany itself was in a state of shock after the bust, it didn’t borrow and tightened its belt becoming more competitive.

All this new debt elsewhere, creates money which floods into these economies increasing the money supply, prices and wages. Their competitiveness is going down compared to Germany, but it doesn’t show up as they are consuming with debt that, in itself, creates money that is pouring into the economy.

They thought the good times would never end, until they did.

A hurricane blew out of Wall Street and laid low the once vibrant global economy. The Euro-zone nations had to load up on debt to bail out their banking sectors.

The financial sector realised that Germany wasn’t going to be bailing everyone out and re-assessed the risks and raised interest rates accordingly. The sustainable debt became unsustainable and the housing booms turned to bust.

The Euro-zone crisis was in full swing and things were allowed to run for quite a long time before the ECB swung into action and bought down interest rates at the periphery and a lot of damage had already been done.

The EU took the debt off the private banks and placed it on EU taxpayers, they were still very concerned about the health of their banks after 2008.

The vast majority of Greek bailouts just return to the EU as repayments on the debt and less than 10% goes to Greece.

There is plenty of evidence to suggest austerity doesn’t work including the IMF’s own forecasts for Greek recovery with austerity.

The IMF predicted Greek GDP would have recovered by 2015.

By 2015 it was down 27% and still falling.

There are many players in this comedy of errors but Greece and the Club-Med nations get the blame.

Batman11's picture

Today’s economics, neoclassical economics, makes numerous spurious assumptions about money and debt.

The technocrats trained in it are as good as useless.

Batman11's picture

The FED missing the obvious before 2008.

2008 was easy to see, it’s just Central Bankers are trained in neoclassical economics and these economists couldn’t see what was coming.

This is the build up to 2008 that can be seen in the money supply (money = debt):

Everything is reflected in the money supply.

The money supply is flat in the recession of the early 1990s.

Then it really starts to take off as the boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan’s loose monetary policy.

When M3 gets closer to the vertical, the black swan is coming and you have an out of control credit bubble on your hands (money = debt).

The theory, which is outside the Central Banker’s neoclassical economics.

Irving Fisher produced the theory of debt deflation in the 1930s.

Hyman Minsky carried on with his work and came up with the “Financial instability Hypothesis” in 1974.

Steve Keen carried on with their work and spotted 2008 coming in 2005.

You can see what Steve Keen saw in the graph above, its impossible to miss when you know what you are looking for.

The FED were clueless.

Vilfredo Pareto's picture

Yeah.  Neokeynesians seem to believe you can paper over any problem forever and ignore it lol.

bentaxle's picture
The European Debt Bomb Fuse Is Lit!

Usual Sunday night ZH bullshit clickbait hyperbole!

Vilfredo Pareto's picture

Well.  We are halfway there lpl. 


When it hits 1.6 trillion for Germany alone and over 2 trillion in aggregate come back and tell me it isn't about to blow lol

tuetenueggel's picture

How did those highly criminal morons in Berlin an Brussels say ?

EU won´t cost Germany a single penny. It will bring wealth, freedom and peace.

Without it we´d see war again. Now we see war at our ( german ) expence.

Target 2 has reached 800 Billion Euros for Germany alone.

To explain:  We exported ( sold ) goods for 800 Billion € which aren´t payed until now.

ECB buys 60 Billion treasuries ( monthly ) from bankrupt european countries like italy, France, Spain, Portugal, Belgium a.s.o. without checking if they and if at all when will be payed back. Germany never will see a single penny of those Target 2 debt.

End 2017 ECB will have debts from EU- Countries for 2,2 Trillion in its books.

Anybody believing the´ll be payed back ? Not me.


OverTheHedge's picture

"To explain:  We exported ( sold ) goods for 800 Billion € which aren´t payed until now."

You sound bitter, and seem to believe that evil southern countries defrauded the upstanding, honest German worker. If you stand this premise on its head, you are getting closer to the truth: Southern European countries were loaded with cheap debt, in order that the honest German workers could make and export stuff. Brilliant for Germany, not so fabulous for the suddenly debt-loaded south. Another way to look at it is that Germany has paid (borrowed) to have its hugely successful export economy, and now the debt is coming due. From a physics point of view, imbalances will want to rebalance. It takes energy to keep them from rebalancing: where is this energy coming from? The ECB?

Lots of debt is going to be written off, or Germany is going to have to come and take possession in person. To do that, they will need an army. Oops.

taketheredpill's picture

I assume defaulting on Target2 isnt exactly an option. The remaining countries could pass a resolution to ban trade.  So maybe it becomes a  negotiation.


France has low T2 deficit  which matches how little impact the transition to Euro was.  Maybe leaving EU least "stcky" for them.

Vilfredo Pareto's picture

If you can't default and target 2 mismatch keeps widening and it can't be paid back then what happens?  Irresistible force meets immoveable object lol.


My guess is they will take the hyperinflation way out rather than deflationary depression, but it is hard to know with those Germans.

Francis Marx's picture

Smart Europeans know they are going to crash and burn. Who do yu think keeps buying the US markets?

Vilfredo Pareto's picture

Anybody can see the stealth socialization of bad debt as private entities give it to the central banks.


When the music stops playing it will be the taxpayer who finds he doesn't have a chair.  If that actually happens it will get ugly.   People don't like being ripped off.

Sudden Debt's picture

In the end, the sollution to leave Europe is to go to war against Germany.

Vilfredo Pareto's picture

How high can target 2 imbalances grow before even the dimmest person realizes the central banks have hit full retard?


My guess is 2 trillion.  I know that seems high, but it takes insanity levels of paper games before many peeps will face reality.


Error on the side of caution, and run for your lives!

TomGa's picture

Here we go again....


Clarke and Dawe:  European Debt Crisis (Parody)