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

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 Billions of euros were withdrawn from accounts in Greece and Spain and banks in stable countries such as Germany put a cap on the amount of money they were willing to lend business partners in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.