BIS Admits TARGET2 Is A Stealth Bailout Of Europe's Periphery

Tyler Durden's picture

While debates over the significance of the Eurosystem's TARGET2 imbalances may have faded into the background now that sovereign yields in the Eurozone remains broadly backstopped by the ECB's debt monetization generosity, and fears about an imminent European breakdown fall along the lines of populist votes more than concerns about lack of funding, the BIS has finally chimed in with the truth about what the TARGET2 number really showed.

As a reminder, in mid 2012, financial pundits "discovered" the gaping imbalances building up within the Eurozone, as a result of a huge increase in TARGET2 claims at the Bundesbank, offset by a matched surge in liabilities across the European periphery, most notably Italy and Spain.

At the time, most conventional economists and analysts, especially those based in Europe, and certainly the ECB, said to ignore the divergence as it was irrelevant. Others, such as Hans Werner Sinn, and this site, warned that TARGET2 is a "less than thinly veiled bailout for Europe's periphery" as the stealth fund flow amounted to a financing of peripheral obligations, illegal under European rules.

Then, at the end of January, it was none other than Mario Draghi who, almost 5 years later, made the first tacit admission that the skeptics were right when he explained to Italian lawmakers that a country could leave the euro zone but only first it would need to settle its debts with the bloc's TARGET2 (T2) payments system. 

"If a country were to leave the Eurosystem, its national central bank's claims on or liabilities to the ECB would need to be settled in full," Draghi said in the letter. He did not specify in what currency the "settlement" would have to take place.  Draghi then suggested that Italeave is possible, but only if the peripheral European state were to first pay down its roughly €357billion in obligations.

In other words, the ECB for the first time admitted what we had said earlier, namely that TARGET2 liabilities, far from some synthetic construct as T2's advocates suggested, were indeed a fungible means to fund the outflows at various peripheral European nations, i.e., a bailout mechanism which however needs to be repaid if a given country had decided that it would no longer need a bailout, tacit or otherwise in the future.

Now, in its latest quarterly report, the BIS analysts Raphael Auer and Bilyana Bogdanova confirm precisely what we speculated, and what Draghi implicitly confirmed in January: that TARGET2 was merely the latest covert means in Europe's disposal to fund sovereigns without breaching the Eurozone's anti-state funding clause, to wit:

In the period leading up to mid-2012, T2 balances grew strongly (Graph A, left-hand panel) due to intra-euro area capital flight. At the time, sovereign market strains spiked and redenomination risk came to the fore in parts of the euro area. Private capital fled from Ireland, Italy, Greece, Portugal and Spain into markets perceived to be safer, such as Germany, Luxembourg and the Netherlands.




Indeed, during that period, the rise in T2 balances seemed related to concerns about sovereign risk. The blue dots in the centre panel of Graph A show the close relationship between the sovereign credit default swap (CDS) spreads of Italy, Portugal and Spain and the evolution of their combined T2 balance from January 2008 to September 2014. Whenever the CDS spreads of those economies rose, the associated private capital outflows increased their T2 deficit. When the CDS spreads decreased after confidence in the euro area was restored in mid-2012, the capital outflows partly reversed, and T2 deficits dwindled.

This is the BIS' effective admission that absent the T2 system, which provided back door funding as "private capital fled" through the front door, the Eurozone would have collapsed, leading to the end of the Euro, the ECB and imminent currency redenomination or as we explained in 2012, a bailout - whether temporary or not - from Germany - which has the most to lose from a Eurozone failure, in the form of a loan, which as Draghi has since explained, must be repaid should a member state contemplate exiting the common currency.

However, where things get amusing is that while the BIS admits that in 2012 T2 balances were effectively stealth loans, this time around, record imbalances are something far more "benign" according to the Basel-based organization:

TARGET2 (T2) balances are again on the rise. Since early 2015, the T2 balances of euro area national central banks (NCBs) have risen steadily, in some cases exceeding the levels seen during the sovereign debt crisis (Graph A, left-hand panel). However, unlike then, record T2 balances should be viewed as a benign by-product of the decentralised implementation of the asset purchase programme (APP) rather than as a sign of renewed capital flight.

Oh ok, so unlike last time around, the massive IOU funded by Germany - again - is nothing to be worried about because it is simply a byproduct of the ECB's QE, which of course, is another stealth way of preventing the Eurozone from imploding by keeping interest rates artificially low. At least back in 2012, Europe did not have Mario Draghi suppressing rates by purchasing €80/60billion or so per month, with the ECB's balance sheet now holding 11% of all corporate bonds in the Euro area. The result was at least a somewhat accurate representation of sovereign risks through record high bond yields. Alas, since then the European bond market has lost all informational relevance as the only trade is whether or not to frontrun the ECB.

The BIS then adds that "the current rise seems unrelated to concerns about the sustainability of public debt in the euro area. The red dots in the centre panel of Graph A show that, between October 2014 and December 2016, there was no relationship between the sovereign CDS spreads of Italy, Portugal and Spain and the evolution of their combined T2 balance."

As the European interbank market is still fragmented, the liquidity does not circulate in the euro area and T2 imbalances grow as the total holdings under the APP accumulate. Indeed, the overall increase in T2 imbalances can be linked closely to the total purchases under the APP (Graph A, right-hand panel). A recent study, which takes into account the precise geography of the correspondent banks of each and every APP security purchase, shows that APP transactions can almost fully account for the re-emergence of T2 imbalances

Well, actually, they are related to concerns of sustainability, however as a result of massive ECB-driven distortions, neither bonds nor CDS are an accurate indicator of sovereign risk. As to whether Europe's fragmented liquidity system and monetary piping - the reason why according to the BIS T2 balances are currently building up - are sufficient to deem the latest build up as benign...


... we will reserve judgment until the ECB is forced to halt its asset purchase program and perhaps raise rates, leading to the same surge in sovereign bonds yields, not to mention CDS surge, that was the hallmark of the summer of 2012 when T2 imbalances hit their previous all time high. After all, what is the ECB's QE other than merely the latest means to keep the Eurozone together by keeping rates of peripheral bonds ridiculously low.

We look forward to a similar report by BIS in the year 2022 when it will, once again, admit that conventional wisdom on Target2 was once again wrong.

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PoasterToaster's picture
PoasterToaster (not verified) Mar 6, 2017 12:24 PM

"If a country were to leave the Eurosystem, its national central bank's claims on or liabilities to the ECB would need to be settled in full,"

Molon labe.

Muh Raf's picture

It's a real-time settlements system for goodness sake, of course claims and obligations will need to be settled before a firm/country could 'unplug'. And those balances are building up because no-ones buying again.

DetectiveStern's picture

Is strange, the RTGS system for GBP (CHAPS) requires members to be as close to flat as possible at the end of the day. Target however do not give a fuck about your liquidity position. Very strange.

Muh Raf's picture

RTGS and CHAPS most definitely not the same. One is a payment system, the other is a clearing system. RTGS has to reccy cash against net settlements balances and is wholesalers only, whereas CHAPS is just lobbing cash from one a/c to another and includes retail punter-to-punter. TARGET2 liquidity is how much cash you've got in your bank (nostro), so arguably the more the better. In the real world though the CFOs like to make the cash work and tends to throw a bit of a wobbler if the liquidity has too much cover. When trading drops the balances increase because there's less being settled. Simple really.

TeethVillage88s's picture

$350 Billion for Italy... double entry bookkeeping... write off to bad accounts, move to sold at discount to credit buyers, Vulture Capitalists.

SO PIIGS, Ireland has corporate support and they say they are all okay now.

- Italy
- Spain
- Portugal
- Greece

and some kind of bone to other ex-EU Countries in the Explosion/Implosion.

Maybe $1.5 Trillion in Write Offs.(Never to be repaid... like the Marshal Plan... oh, yes... Europe doesn't remember US Funding War Reparations/Rebuilding)

Muh Raf's picture

Ireland is not okay and neither are the others. All that non performing debt was hived off into "bad banks" - there's one German asset manager with 260bn of bad Irish property debt alone. Wait till that stuff hits maturity and there's nothing in the kitty to pay the holders; it's all just a massive can kick, a couple of decades and plus into the future.

auricle's picture

We will settle those debts with our own newly printed Italian fiats. Paper for paper.

Dead Canary's picture

"Tippecanoe and Target too!"

It could be Draghi's new slogan.

Greenspazm's picture

Mitch Shaggalott wrote this 6 posts ago.

LawsofPhysics's picture

LOL!!!  Like so much of the planet, exponentially growing paper/digital claims and fewer and fewer real assets...

Global fucking Weimar.


piceridu's picture

"We look forward to a similar report by BIS in the year 2022 when it will, once again, admit that conventional wisdom on Target2 was once again wrong."

In 2022, we will shopefully see the EU listed in the obituary column. 

LawsofPhysics's picture

"I would gladly pay you Tuesday for a hamburger today" - Mario Draghi.


Hey Mario, it's Tuesday motherfucker.

Orly's picture

Not a stealth bail-out.

Little do German bond holders realise, it is actually a bail-in!  (To the tune of a Trillion Euros.  How easily that word rrrrrolls off the tongue nowadays...Trrrrrrillion.)

OOoops!  Tag.  You're it!


Greenspazm's picture

Then show them a German bondage video.

Bam_Man's picture

TARGET2 liability imbalances will eventually be settled in Pesetas, Lira, Francs and Drachma.

There is no other way.

Orly's picture

With a severe discount for that haircut.


Bam_Man's picture

And German taxpayers/bondholders having to foot the bill for re-capitalizing the Bundesbank (which I think you alluded to in your prior comment, above).

TeethVillage88s's picture

What if they seized Vatican Assets, Gold, Treasure, vaults, catacombs, bank...?

Include Vatican in Bail-In Process.

Atomizer's picture

I failed to follow up with the guy posting from Australia. My mishap. Have a look. This was provided on March 1, 2017. 

You can go to various places, I hone in on derivatives. Meanwhile, search around. Give feedback. 

Video: How to use BIS statistics on debt levels


Property prices in Q3 2016


Disgruntled Goat's picture

Yeah, sure. Italy wil pay. No problem.

Old Muppet 1's picture

If a country owes a political/economic union several hundred million dollars, the country has a problem.  If a country owes a political/economic union nearly a trillion dollars, the union has a problem!

Shibboleth's picture

O that's easy: ItalExit -> introduce new Lire -> turn on printer -> Crtl-P -> payback Deutsche -> e presto

THE DORK OF CORK's picture

Balance sheets not seen in nature.

Efforts by the money power and monied persons to convert the laws of thermodynamics into credit and debit accounts is untrue to nature. 

barysenter's picture

All the central banks are the luciferian old world order. Kill the Fed.

falak pema's picture

Its basically Eurobonding by other means...The confederate laws do not allow the ECB to buy sovereign bonds of member countries. 

If Mutti had accepted that change in 2009 we would not be here. Once the Trichet austerity brought about the PIIGS crisis it became necessary to do what Draghi would call "doing what it takes" and which was a repeat of FED QE started in 2009. ECB became a financially federated world via CB and TBTF hanky panky to save the previous malinvesments !

So this is sovereign and corporate bonds buying via ECB whose last port of call would be "bail ins" by national banks and then Bundesbank back up if it went over.

But hell, that is now the name of the game.. the whole of OECD does it and China is now world leader in QE all to save its empty city mal investments. 

The only way out is inflation over 50 years. Will it work when the Debt costs go up and all assets are too overpriced to provide profit juice?  Thats the big Trilemma and its faces the Triffin Paradox for King $ pains and Jevon's paradox for derivatives games in the hope of not being last man standing in the casino musical chairs lottery. Some awesome catch 22.

Haha ! We go back to centrally planned economies with a vengeance and Keynes is now economic king of the Universe! 

For the EU to survive they will have to discipline fiscal policy on the same page without tax havens... some nation state knife stabbing and dirty linen battles in perspective; like Brexit now occurring.

TeethVillage88s's picture

Guess there is a lot to this. (TARGET2, Single Currency, Single Settlement Hub)

Payment system classification (year of reference 2012)

Systemically important payment systems (SIPS) Competent authority

TARGET2, operated by the Eurosystem European Central Bank
EURO1, operated by EBA Clearing S.A.S. European Central Bank
STEP2T, operated by EBA Clearing S.A.S. European Central Bank
CORE(FR), operated by STET S.A.S. Banque de France

Non-systemically important large value payment systems



EBA Clearing is a provider of pan-European payment infrastructure with headquarters in Paris. It is wholly owned by its shareholders.

Its initial mission consisted in the operation of the clearing and settlement system for single euro transactions of high value EURO1, which the Euro Banking Association (EBA) had transferred to EBA Clearing for the launch of the system in 1999. Besides EURO1, EBA Clearing also owns and operates STEP1, a payment system for single euro payments for small and medium-sized banks, and STEP2, a Pan-European Automated Clearing House (PE-ACH) for euro retail payments. In March 2013, EBA CLEARING launched MyBank, an e-authorisation solution for online payments, which is geared at facilitating the growth of e-commerce across Europe.[1]

STET S.A.S. is a critical operator for our clients, the banks and the banking communities we serve every day.

Stet is responsible for more than 22 billion transactions a year, representing an average of 25 billion Euros per day. This is a great responsibility that we take for banks, central banks and finally end-users.


SEPA services, Finland is part of the the Single Euro Payments Area SEPA.

Domestic payments are transmitted as SEPA Credit Transfers

The payments are transmitted between banks through the SWIFT network via EBA Clearing and settled in TARGET2, usually in the night-time settlement cycle.


Urgent payments from national to international service

Urgent payments are forwarded via the Finnish online urgent payment system (POPS). An urgent payment is transferred from the originator to the beneficiary within one hour on banking business days.

TeethVillage88s's picture

International central securities depository (ICSD)

An international CSD is a central securities depository that settles trades in international securities such as eurobonds although many also settle trades in various domestic securities, usually through direct or indirect (through local agents) links to local CSDs. Examples of international CSDs include Clearstream (earlier Cedel), Euroclear and SIX SIS. Some view the US Depository Trust Company (DTC) as a national CSD rather than an ICSD, but it does hold over $2 trillion in non-US securities and in American depositary receipts from over 100 nations.

- Reference seems to have missed Cede and Company... or I don't yet see the difference (Wiki doesn't mention any Domestic Central Security Depositories.

See also

Clearing house
Custodian bank (CDS Ratings and News Service)

TacticalTrading's picture

I'm just making up stupid stuff here, but...

If Italy is part of the EU, then doesn't that mean it is also part of the ECB? 

And if it is part of the ECB,
and if it decides to leave,
then shouldn't it be able to sell its part of the ECB? ... back to the ECB?


Yea, I know. 
It sounded cool until I wrote it out.  


GCT's picture

TPTB will simply cull the herd of people with a masive war before they let their system fail.  The world is already over populated and the time is coming my friends.

A couple of billion is nothing to these psychopaths.  I feel sorry for future generations if any are left standing.  Too many nukes equals an extinction event.

Let it Go's picture

President Trump has dramatically changed the balance of power in Britain’s trade negotiations with the EU. Any hope the Euro-zone is about to suddenly turn the corner is more based on false hope and a wish than a reflection of events on the ground.

The fact is their banks are neither "fixed" or the system healthy. Greek debt it again an issue. Italy is deeply in debt, unemployment is high in many countries especially among the youth population, and refugees continue to flood in adding more stress to an overburdened social system. The article below delves into these problems.

Mediocritas's picture

The convergence of sovereign yields in the Eurozone has always been completely unnatural given that there is no convergence of the underlying economies. 

In fact, the convergence is enabled by pushing the differences into TARGET2, a point that guys like Hans-Werner Sinn have been making for a decade now.

Bear in mind also that lending through TARGET2 is collateralised, but that collateral can be provided as the sovereign debt of the very same nation that's borrowing. Regardless of the health of the economy in question, that sovereign debt is weighted equally across the Eurozone by the ECB which turns a blind eye to the reality.

Let that sink in for a while.