Jens Weidmann Defends Bundesbank Against Allegations Of TARGET2-Induced Instability

Tyler Durden's picture


We have previously discussed the substantial, and growing, threat to the German economy that is the Bundesbank's negative TARGET2 balance, which we have formerly dubbed Europe's €2.5 trillion closed liquidity loop, which just rose to a new record over €550 billion (in "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?", "Goldman's Take On TARGET2 And How The Bundesbank Will Suffer Massive Losses If The Eurozone Fails", and most recently  in "Dear Germans: Bring Out Ze Checkbooks") which in turn merely represents the taxpayer funded capital flow to insure that the Eurozone remains solvent for one more day as Germany's peripheral trading partners receive rescue capital every day in the form of recycled German current account surplus. It now appears that the Bundesbank president has taken to these allegations of monetary instability strongly enough to where he has just released the following response on Target2 in "What is the origin and meaning of the Target2 balances?" Full letter below.

From the Deutsche Bundesbank

Dr Jens Weidmann, President of the Deutsche Bundesbank, writes about the Target2 balances. The text was published as an open letter in the Frankfurter Allgemeine Zeitung and Het Financieele Dagblad on 13 March 2012.

What is the origin and meaning of the Target2 balances?

Target2 has recently been subjected to critical scrutiny in connection with the Eurosystem’s role in containing the sovereign debt crisis. But what does this ominous term, which many people equate with additional risks for the taxpayer, actually mean?

Target2 is, in effect, a European money grid through which liquidity circulates in the euro area. It is a payment system used for the cross-border transfer of central bank money between euro-area national central banks (NCBs). This liquidity arises in the individual countries predominantly as a result of the NCB’s refinancing operations with commercial banks. Liquidity is transferred when-ever central bank money is transmitted from one country to another. This results in claims on and liabilities to the European Central Bank (ECB), which acts as a kind of clearing house. The transferring central bank records a liability – a negative Target2 balance. The recipient central bank is credited with a claim – a positive Target2 balance. If euro-area monetary policy were centralised at the ECB, there would not be any Target2 balances; however, this would not inherently alter the risks associated with providing liquidity.

Prior to the financial crisis, these balances more or less offset each other. The NCBs provided banks with liquidity via refinancing operations, chiefly to enable them to meet their minimum reserve requirements and to put cash into circulation. Banks’ cross-border funding requirements were generally met via private capital flows, for instance through interbank lending and borrowing. With the onset of the financial crisis, and especially following the emergence of the sov-ereign debt crisis, confidence in public finances and national banking systems started to shrink in a number of countries. Private sources of funding, including the interbank market, contracted, were regarded as too costly or all but dried up. To fund their liquidity needs resulting, for instance, from the sale of goods or capital outflows, banks turned increasingly to the Eurosystem. This was possible because the Eurosystem has progressively expanded its provision of liquidity since the onset of the financial crisis, now providing unlimited amounts (full allotment), at low interest rates and for significantly longer maturities. At the same time, the Eurosystem has perceptibly lowered its collateral standards, eg for ratings.

This has considerably changed the Eurosystem’s role as a liquidity provider. Whereas before, it provided only the bare minimum of central bank money, the Eurosystem has now largely taken over the liquidity functions of the interbank market and other cross-border capital flows. The total volume of refinancing transactions has risen from approximately €460 billion on the eve of the financial crisis to over €1,100 billion at last count, and the average maturity of the transactions has spiralled from a few weeks to almost three years. The share of euro-area peripheral countries in the volume of refinancing operations has concurrently climbed from one-sixth to around two-thirds. The continued net outflow of liquidity from the peripheral countries has caused them to accumulate combined Target2 liabilities in excess of €750 billion.

It is the Eurosystem’s task to provide central bank money – to solvent banks in return for sufficient collateral and without endangering price stability. This ensures the provision of credit to the economy, and can also strengthen financial market stability. However, it is essential to keep monetary policy and fiscal policy strictly segregated and, in particular, to stringently observe the prohibition on the monetary financing of governments. Neither providing life support to ailing banks nor propping up the solvency of sovereigns falls under the remit of monetary policy. Decisions relating to the redistribution of major solvency risks of banks or governments among taxpayers across the euro area is the sole responsibility of elected governments and parliaments. Admittedly, it is not always possible to clearly differentiate between liquidity shortages and solvency risks of banks and, precisely in times of crisis, a certain degree of flexibility is appropriate for a short time. However, this can also inflate risks on central banks’ balance sheets, and moral hazard may assume a critical dimension.

An increase in Target2 balances may thus mirror a bona fide monetary policy response to a looming liquidity crisis within the bounds of its mandate. To that extent – as the Bundesbank has repeatedly pointed out – criticism of the Target2 balances per se is misplaced. As I see it, the Bundesbank’s Target2 claims do not constitute a risk in themselves because I believe the idea that monetary union may fall apart is quite absurd. Whether and to what extent losses arising from liquidity provision actually impinge on the Bundesbank’s balance sheet does not depend on the volume of the Bundesbank’s Target2 claims. This is also true for the hypothetical scenario, which has sparked much public debate, of a member state with a negative Target2 balance potentially exiting monetary union. Even in such a case – which I consider to be highly unlikely – the risk remains rooted in the nature and volume of the liquidity provision. This might result in partial defaults on the ECB’s claims. However, any losses sustained by the ECB would have to be borne jointly by all Eurosystem central banks, irrespective of the size of their Target2 balance.

In the Eurosystem, however, there is broad agreement that the non-standard monetary policy measures are limited and temporary, and that they may on no account be used as a pretext to postpone necessary financial and economic policy reforms. It is an uppermost concern of mine to ensure that this does not give rise to any stability risks, such as would be the case if the public were to believe that monetary policy were being held hostage by fiscal policy. The risks that the Eurosystem is assuming are, to a certain extent, unavoidable, but we are making every possible effort to ensure that these remain within justifiable bounds. This will be aided by Eurosystem efforts to speedily devise a plan for central banks to scale back the extensive provision of liquidity in a timely manner so as to preclude the danger of inflation. At the end of the day it is the member states, and not the central banks, that hold the key to resolving the crisis.

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Thu, 03/15/2012 - 10:57 | 2257729 Biggvs
Biggvs's picture

It's going to be a long, hot summer in Greece. For protestors, perhaps "heat waves" may even be guaranteed. (TARGET2 gap to be filled by surge in Greek exports of Soylent Green?)

Thu, 03/15/2012 - 12:15 | 2258194 bank guy in Brussels
bank guy in Brussels's picture

Super first-hand article reporting on the in-the-streets revolution beginning in Greece ... people gathering weapons and so on, with much popular support:

Thu, 03/15/2012 - 10:51 | 2257730 Gloomy
Gloomy's picture

What a load of crap!!

Thu, 03/15/2012 - 10:52 | 2257734 battle axe
battle axe's picture

"the danger of inflation" hello, it is already coming full steam....

Thu, 03/15/2012 - 10:54 | 2257744 Jim in MN
Jim in MN's picture

Zee Iranian instabiliteee


SWIFT financial service cuts ties with Iran

BRUSSELS (AP) — The SWIFT global financial transaction service said Thursday that it was cutting ties with Iranian banks that are subject to European Union sanctions aimed at discouraging the country from developing nuclear weapons.

The action effectively enforces EU sanction because the world's financial transactions are impossible without using SWIFT, and it will go a long way toward isolating Iran financially.

The company's name stands for Society for Worldwide Interbank Financial Telecommunication. It is a banking hub crucial to oil, financial transactions and other trades.

In a statement, SWIFT said the EU decision "prohibits companies such as SWIFT to continue to provide specialized financial messaging services to EU-sanctioned banks."

"Disconnecting banks is an extraordinary and unprecedented step for SWIFT," Lazaro Campos, chief executive of SWIFT, said. "It is a direct result of international and multilateral action to intensify financial sanctions against Iran."

In addition to sanctioning various officials and freezing the assets of certain companies, the European Union plans to institute an embargo on the import of Iranian oil in July — an attempt to choke off funding for Iran's nuclear program.

The EU sanctions are aimed at forcing Iran to demonstrate to the international community that it is not trying to develop nuclear weapons. Iran says that its nuclear program is for peaceful purposes only, but officials in many other countries — including Israel — believe otherwise.

Thu, 03/15/2012 - 10:56 | 2257751 DeadFred
DeadFred's picture

My sports-fan nephew once told me that when rumors are flying that a head coach was about to be fired and the team owner holds a news conference saying he has total confidence in the guy you know he'll be looking for a job within a week. I wonder it works that way in finance. When you have to deny the allegations of fringe bloggers you know you're in trouble. Blood is in the water.

Thu, 03/15/2012 - 10:58 | 2257757 Village Smithy
Village Smithy's picture

I notice that the letter contains no charts or graphs only verbal obfuscation.

Thu, 03/15/2012 - 10:59 | 2257764 crash_davis
crash_davis's picture

"the idea that monetary union might fall apart is quite absurd."


Just like the idea that we were days away from a total failure of the global financial system must of seemed absurd.

Thu, 03/15/2012 - 11:05 | 2257774 Cdad
Cdad's picture

At the end of the day it is the member states, and not the central banks, that hold the key to resolving the crisis.


Truly a WTF quote if ever there was one.  The ECB is minimally all in at 2.5 trillion...and the PIIGS hold the key?  Seriously?  Is that going All In with a 10 high or what?

So if I am reading him properly, either through a miraculous economic rebound...or by shared losses across the spectrum of central banks, all is solved and 6 sigma risk is mitigated?  This as the ECB subordinates all Euro bond holders to itself...and...ummm...sources of funding dry up...and "liquidity" on candy bar wrapper collateral is racked up...and...ummm....

Does anybody know if this Weidmann is speaking in some other language or something?  WTF is he talking about?

Thu, 03/15/2012 - 11:05 | 2257788 chinaboy
chinaboy's picture

The Germans still not answering the question: did they use central bank to support insolvancy? Are  LTRO, SMP financial alchemy? They can refute criticism. But time will tell they are frauding honest Europeans.

Thu, 03/15/2012 - 11:17 | 2257817 Clowns on Acid
Clowns on Acid's picture

"This will be aided by Eurosystem efforts to speedily devise a plan for central banks to scale back the extensive provision of liquidity in a timely manner so as to preclude the danger of inflation. At the end of the day it is the member states, and not the central banks, that hold the key to resolving the crisis."

This sounds like Helicopter Ben. If it is the member states (in US = Congress) that hold the key to resolving the are truly fecked!

It was these arseholes (ably assisted by Fannie/Freddie, GS, Citi, BOA,) that created the crisis to begin with.

Thus one should read this as the Pres of Bundesbank telling everyone to buy PM's.

Thank you Herr Weidman. 


Thu, 03/15/2012 - 12:24 | 2257952 Bunga Bunga
Bunga Bunga's picture

Sorry, but this article sounds like Eurocrats propaganda.

"As I see it, the Bundesbank’s Target2 claims do not constitute a risk in themselves because I believe the idea that monetary union may fall apart is quite absurd."

The idea that monetary union may fall apart is quite absurd?

That a member state with a negative Target2 balance potentially exiting monetary union is highly unlikely?

On what planet does the author live?




Thu, 03/15/2012 - 23:03 | 2260583 malek
malek's picture

So in the unlikely event a Euro member exists and defaults on ECB's claims, the remaining members of the Euro zone will share the loss between each other.

That's what Weidmann in effect stated.
I'm sure the Germans are happy to hear not all of TARGET2 losses would need to be borne by them - if the other members play by the rules that is.

So Jens Weidmann has declared himself a muppet too.

Tue, 03/20/2012 - 05:15 | 2272490 simonsito
simonsito's picture

I love the smell of denial in the morning...:
"However, any losses sustained by the ECB would have to be borne jointly by all Eurosystem central banks, irrespective of the size of their Target2 balance."

like that would change anything.....I think I might have to go check the german commentary in Frankfurter Allg. Zeitung, even though they are heavily censoring over there, it might be a lot of fun to see my fellow german michels emmitting uninformed ramblings about "those lazy southerners" and stuff alike .... :D

Tue, 03/20/2012 - 05:29 | 2272496 simonsito
simonsito's picture

looks like they finally got past bashing greeks...! So maybe theres hope, if it wasnt a tiny fraction of society that has grown up to see the charade...

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