German TARGET2 Claims Soar To €729 Billion

Tyler Durden's picture

We have some good news for our German readers: in the month of June, your implicit cost of preserving the Eurozone (read the PIIGS) via TARGET2 funding of current account and various other public sector deficits and imbalances amounted to only €1 billion/day, down from €2 billion in June. We also have some bad news, which is that Europe's negative convexity ticking inflationary timebomb (why inflationary: Why Germany's TARGET2-Based Eurozone Preservation Mechanism Is Merely A Ticking Inflationary Timebomb), which guarantees that with every month in which nothing is done to undo the Buba's onboarding of liquidity risk, the risk for an out of control implosion of German, and implicitrly all European monetary institutions, rises exponentially, and just hit an all time high of €729 billion. To everyone who naively believes that a deus ex can come out of stage left and somehow reverse this guaranteed loss to German taxpayers (sorry: no free lunch) in the form of even more guaranteed inflation down the road, we suggest you short the chart below, somehow (and when you figure out how, let us know, so we can do the opposite).

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LawsofPhysics's picture

Hhmmm.  The real question is who will light the fuse?  I sense that all governments want to start nationalizing their assets and more...

Things should start getting really interesting when CONgress comes back. 

persu's picture

People do not seem to realize that ECB is the only viable solution, like it or not. I do not like it, but no tax money is enough to cover this hole we have dug ourselves into. Take expected value of seignorage for expanded central bank money by assuming a tolerance for higher inflation target of 3-4%, or maybe occasionally even higher. A combination of financial repression and recapitalisation of ECB theough old fashioned seignorage gives ECB very deep pockets. Delevaraging takes place secretly, our drifty pensioners will pick the bill while complaining of lost purchasing power.

Does this make any sense? Cost of disintegration is higher than keeping the dysfuntional mess intact, which still is the case. Disintegration means default, integration inflation, both result in lower debt.

FatuousTwat's picture

(and when you figure out how, let us know, so we can do the opposite).

Guns and Gold Tyler

Sockeye's picture

Zingers like that, it's why we keep reading ZH. Love it.

old naughty's picture

wait, let me get this straight, are you saying we should short guns and gold, because Tylers say go opposite?

Man, this is confusing as hell (oops).

Manthong's picture

It's only about a lousy trillion dollars.. and it is all low risk central bank money, right?

Um.. what part of this equation doesn't somebody understand?

boricuadigm-shift's picture

Not really, nowadays all you need is 40 bits for 1 Trillion!


magpie's picture

This deserves to be sent to Soros and Krugman..daily, as a reminder that austerity is reigning in the Eurozone.

williambanzai7's picture

These charts are either going up or going down, but it is never good news.

bank guy in Brussels's picture

€729 billion ... 'Tis not so deep as a well, nor so wide as a church door ... but 'tis enough, it will serve ...

Dr. Engali's picture

 Germany's worst fears about inflation will come to fruition and thanks to their history they will be the scape goat for everything that happens. Regardless of what they do.

Cangoroo's picture

No, the likelyhood of inflation is zero.Sinn and some German economists are fools to believe that Target 2 is a significant measure. It is by all means simply a bloated balance sheet, bloated yes, on both sides assets and liabilities. Balance sheets can be cleaned up. Sinn raises the point that the Fed system has a kind of Target 2 system as well, he thinks it works better. This is a side issue because balance sheets can always be corrected. The Fed system does it quicker. Inflation is no issue because real wages and consumption including real estate have a long way to catch up. Look at property prices in Berlin, Paris or London. One might call this inflation, but such inflation is just fine until it creates an asset bubble.

magpie's picture

Ah, and if German industry was only competitive via surpressed wages and other lower input costs, it is all right to raise rents and institute some more odious energy 'subsidy' schemes. They all pay for themselves.

Cangoroo's picture

No, if real wages rise in line with consumption this will cause no problems. Simply less exports, fully compensated for by higher domestic demand.

magpie's picture

Higher demand ? You couldn't buy that much Greek and Spanish olive oil and real estate if you wanted to. Or Gildemeister machine tools and Leopard 2 tanks.

Cangoroo's picture

No, impossible. But you see German companies are told that they are operating in a small dometic market. Well what a joke. The EU market is not that tiny. Currently Germany exports goods and - to make the balance - capital. This what is rightly called stupid German money. China withholds its dollars. So instead of exporting capital and to invest in Spanish real estate or CDOs, better to invest it domestically.If it means fewer Leopards, I do not care, would be even a good thing.

magpie's picture

You are simply asking for Germany to subsidize failed states unconditionally AND painfully restructure its industries. There's a choice...

Cangoroo's picture

No there is no choice. You cannot run trade surpluses or deficits eternally because there is always only a limited amount of capital available and capital seeks - with deficiencies - optimal allocation . That is why on a global scale trade balances always match. To do it later and forced is not an alternative. All advanced economies need to move up the value chain and let others climb the ladder. 

magpie's picture

Maybe this EU thingamajig is preventing optimal allocation.

Cangoroo's picture

Let me explain,

I generally follow the Austrian school of economists but I also have strong influences from economists like Selten. But I am not dogmatic at least I hope so. 

Both public and private sector have a tendency to waste capital. I would agree with Friedman, this tendency might be more prevelant in the public sector but our general problem is very often a lack of data and empirical evidence and too often based on stereotypes. assumptions and models. If applied to the EU, maybe - maybe not. Sorry to say this. The world is not painted in black or white, grey is dominant.

Winston of Oceania's picture

I would only add that when so called public sector undertakings do poorly MORE taxpayer capital is thrown into the hole. In some cases I think you might agree that money NEVER stops being thrown away. I would dare go further and claim that in such cases corruption is at the root, after all you simply cannot expect the olgarchy to work for the slaves can you? Do our overlords not have children of their own to consider? Imagine whole bureaucracies created just for the sake of employing the party. You know the progressives that populate BOTH sides of the isle in Washington. There is no left or right, only illusion to keep the sheep distracted while the oligarchy tends the gate.

Bunga Bunga's picture

Target 2 is not a simple balance sheet issue. Target2 balance of EUR 729 bln are cash liabilities of the Bundesbank to German commercial banks, while there are no assets/collateral of the same amount in the Bundesbank. The Bundesbank has only claims on assets against the ECB, while the ECB has claims against other national banks. Since there are no assets transferred, there is a balance piling up known as Target2. If there were sufficient assets in possession of the other national banks and then transfered via the ECB to the Bundesbank, the Target2 balance would be close to ZERO.

In the Federal Reserve system balances are cleaned up by the exchange of collateral (gold certificates) between the regional Federal Reserve banks.

Also no bank in the world would rely on a paper contract solely, that's why banks take collateral for credit.

In the ECB system some of the national banks ran out of collateral and Target2 could stretch the system to infinity. As long as all follow the rules, no one leaves the Euro and no one goes bankrupt, Target2 balances are not a problem at all, but there is a significant risk, if something bad happens - Sinn is absolutely right about his claims.

Cangoroo's picture

You are thinking in terms of collaterals or assets as an exchange mechanismn between central banks. So if covenants are missing your trading partner goes bust, well so does the other party. Nowadays most of our contracts are written on paper and not asset backed.

The whole asset backed system should ask themselves a simple question. What are their wonderful assets worth in the real world? The only real asset what exists in the world of business and finance is mutual trust. Your assumption states that in the case of an asset transfer the obligation can be covered.

Sorry, this assumption is no longer valid since the the ongoing crises has proven to be the opposite. Are Spanish bank balance sheet clean because they have collaterals. No sorry, they would have been better off without.  Colleterals deceive investors and lead to a false sense of being insured. v. Hajek would say, they destroy risk awareness.

Bunga Bunga's picture

You are essentially saying collateral is useless. Please, please tell this my bank. They do not need to collect collateral anymore because they would do better off without, when I take out a cash loan. Sorry, but this is fantasy banking, it does not work in the real world. In the end somebody has to foot the bill if it fails. In case of Target2 the German taxpayer, either through hefty inflation or loss realization of the Bundesbank by the government aka taxpayer.



Cangoroo's picture

it is essentially useless in a modern economy because it is based on perceived values. I would not dare to say that this is a majority opinion, quite the opposite. But think about it, if it makes sense and questioning ourselves is how our species evolves. I mean the problems we face have brought to light that the stone age techniques of securing loans are slightly outdated. Coming back to inflation, I pointed out that I do not have an issue with that. I agree with Krugman, people are threatened. It works with the old generation but 1923 is way back in times. And I think most people do not want to see a 1932 scenario again. Inflation can be controlled easily, if one wants it. Schacht - who was a banking genius - but unfortunately a lousy character - has demonstrated this. Inflation may happen in Zimbabwe - more civilized nations can control it, if they want to.

allocater's picture

My understanding is that these 700 billion are already inside Germany and it has not caused a super inflation so far.

Now if South Europe defaults on the target-2 imbalances the Bundesbank can just delete the claim. I don't think the mere deletion of this claim would cause inflation, even though technically and mathematically it would be the concession that the Bundesbank has printed 700 billion out of nothing.

Winston of Oceania's picture

Intervention in markets in any manner destroys the markets themselves, misalocation of capital has an opportunity cost as well and in the long run even if you don't create a bubble you destroy the market.

Curtis LeMay's picture

LOL! Do the German people even know what's going on??

I find it very hard to believe that they would tolerate such insanity...

If true, our (normal - non eurofanatic) German friends and brothers really have no choice. Sanity must prevail, just like reality always does.

Cut your losses - before it is too late. Let the beggars in euroland go...or impoverish yourselves, your children - and your grandchildren, bailing the euro-med and froggystan out...


Dr. Engali's picture

The same question could be asked of the American sheeple. They have no idea how many ways they are geting fleeced.

Curtis LeMay's picture

True, but we can afford it.

We are the only one's who can afford a reset, which I grudgingly welcome...

Curtis LeMay's picture

LMAO - 5?!

Guys, having the worlds' only reserve currency has it's benies too...

That's all I'z saying.

Curtis LeMay's picture

They have no idea how many they are geting fleeced.

Yep, and they don't deserve it.

So, what should we do with the retail brokers who have been for a generation been pushing absolute garbage on unsuspecting clients and ripping off the middle class until they have nothing left to retire on?

I reckon these brokers just go to sleep at night telling themselves that these "stupid" people got what they deserved...for being "stupid", eh? Maybe I should offer up some info as to what I was privy too at FirstHanover, just for kicks?

Moving ahead, it's all coming to a head for us in the US at the end of the year anyway.


Winston of Oceania's picture

Acceptance of this nonsense is accepting the yoke of reparations from WWI all over again, completely insane.

allocater's picture

What is going on? Germany is 700 billion richer now. Except the average Joe (Hans) does not feel the new 700 billion that are now in Germany. Who has it? Only the banks and elites.

I am more equal than others's picture

Sgt. Schultz to Colonel Klink...'I know nothing....NOTHING'

This is a Hogan's Hero moment.  Unfortunately it is Hulk Hogan.

Wiemar Redux where the sequel is better more painful than the original.

Curtis LeMay's picture

Think about it: One TRILLION DOLLARS is owed the German people, and that's just day to day to stuff (i.e. no bailouts included)...

What are the Germans doing? I know many of them are crazy - in a good way. But they are certainly not stupid...

was machst du meine freunde?


Burr's 2nd Shot's picture

729 billion Euros pretty much wipes out any competitive currency advantage the Germans have from staying in the Euro, doesn't it?

Cangoroo's picture

Valid question? But do economies compete? Companies do.

magpie's picture

Well, but if transaction costs rise both through taxation and debt service above those caused by currency exchanges...

Cangoroo's picture

Macroecomonics ist not about competition between economies. It is about establishing a fair and undistorted playing field. You are right, as soon as the gold standard was dismantled all central banks tried to fiddle and play with currencies as a way to gain a competitive edge. The Chinese are prime candidates for this foolish game. But no, macroeconomics is not a super bowl. A false understanding makes people like Soros rich.

magpie's picture

Yes, but even that enterprise of creating a fair and undistorted playing field within the EU has failed.

emersonreturn's picture

cangoroo, even if nations no longer compete, the illusion remains at least beneath the guise/fog of war.

Cangoroo's picture

People compete, companies compete, states compete, economies simply do not. Well you can try like the French did with Colbert. It worked well, poor Louis XI might have a different opinion, if he had a head. An economy is even hard to define, because it is never the same as a state, it is more complex. One could argue that Mexico is part of the US economy.

magpie's picture

Yet you live under the illusion that the EU is that 'one economy'

emersonreturn's picture

certainly you are right, Canada might easily be considered part of the US economy, and to a degree the US part of China's, but i suspect a line may eventually be drawn to make the distinction clear.

Cangoroo's picture

That is not so easy since we haft left the trees. If you think about all the former colonies, they were basically part of the colonizers' economies. Interesting that most Spanish gold from Soutern America finally went to China. Economics are hardly compatible with the idea of a state or a nation. Economies were and still are connected and global trade has started at least centuries ago. And it worked better with a common currency which used to be a gold or silver standard. The idea of flexible currencies was a huge a mistake.  That does not mean that I propose a return to gold. The IMF as created after world war ii and a currency basket, which already exists could be a better solution.

emersonreturn's picture

certainly it's fascinating that Incan gold has found its way to China.  i'm not sure i follow you regarding the IMF, as it already exists, as a possibly preferable solution to a return to gold?  would you mind elaborating?

Cangoroo's picture

Yes it exists. But de Gaulle and his policies wanted to see the Franc established as a challenge to the dollar and its role as world currency. So he brought the French gold back to France. This finished the Bretton Woods system and murdered the IMF back in 1971. Friedman and others persuaded Nixon to let all currencies float. In this respect most US economists - Krugman, Rogoff etc. believe that this was a brilliant idea. It was not a brilliant idea, because looking at data from the beginning of the late 60-ies - well shit started to grow. Debts were growing and there were permanent currency wars destroying fortunes. Mosts economists blame it on the first oil crisis but that is a lame excuse. One could argue that the first oil crisis was a direct consequence of floating currencies. Since then it is permanent crisis management. Might there be a better correlation than a small war in Palestine.