The ECB's Target2 Lies - Exposing The Real Capital Flight From Italy & Spain

Authored by Mike Shedlock via,

The ECB claims that Target2 does not represent capital flight. Evidence says the ECB is wrong, especially for Italy and Spain.

I have discussed this previously, but let’s recap Target2 before taking a look at new charts.

Project Syndicate writer, Hans-Werner Sinn, explains why the ECB’s asset purchases and Target2 imbalances constitute “Europe’s Secret Bailout”.

Under the ECB’s QE program, which started in March 2015, eurozone members’ central banks buy private market securities for €1.74 trillion ($1.84 trillion), with more than €1.4 trillion to be used to purchase their own countries’ government debt.


The QE program seems to be symmetrical because each central bank repurchases its own government debt in proportion to the size of the country. But it does not have a symmetrical effect, because government debt from southern European countries, where the debt binges and current-account deficits of the past occurred, are mostly repurchased abroad.


For example, the Banco de España repurchases Spanish government bonds from all over the world, thereby deleveraging the country vis-à-vis private creditors. To this end, it asks other eurozone members’ central banks, particularly the German Bundesbank and, in some cases, the Dutch central bank, to credit the payment orders to the German and Dutch bond sellers. Frequently, if the sellers of Spanish government bonds are outside the eurozone, it will ask the ECB to credit the payment orders.


In the latter case, this often results in triangular transactions, with the sellers transferring the money to Germany or the Netherlands to invest it in fixed-interest securities, companies, or company shares. Thus, the German Bundesbank and the Dutch central bank must credit not only the direct payment orders from Spain but also the indirect orders resulting from the Banca de España’s repurchases in third countries.


The payment order credits granted by the Bundesbank and the Dutch central bank are recorded as Target claims against the euro system.


For the GIPS countries [Greece, Italy, Portugal, and Spain], these transactions are a splendid deal. They can exchange interest-bearing government debt with fixed maturities held by private investors for the (currently) non-interest-bearing and never-payable Target book debt of their central banks – institutions that the Maastricht Treaty defines as limited liability companies because member states do not have to recapitalize them when they are over-indebted.


If a crash occurs and those countries leave the euro, their national central banks are likely to go bankrupt because much of their debt is denominated in euro, whereas their claims against the respective states and the banks will be converted to the new depreciating currency. The Target claims of the remaining euro system will then vanish into thin air, and the Bundesbank and the Dutch central bank will only be able to hope that other surviving central banks participate in their losses. At that time, German and Dutch asset sellers who now hold central bank money will notice that their stocks are claims against their central banks that are no longer covered.

Target2 Liabilities

A quick perusal of Target2 Balances for January shows capital flight has largely stabilized but the imbalance in Spain hit a new record.

ECB’s Story on Target2 Doesn’t Add Up

Financial Times Alphaville guest writer Marcello Minenna makes a case in pictures for what I have long stated.

It’s interesting to note that Minenna is the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator.

Minenna says the ECB’s Story on Target2 Doesn’t Add Up

Mienna compares France with its stable Target2 balance to Italy and Spain.

France Target2 Over Time

The red line with dots represents the imbalance. As of July France had a Target2 liability of 12.2 billion. France shows no correlation to ECB asset purchases.

Germany Target2 Surplus

Italy Target2 Liability

Spain Target2 Liability

Mienna goes over what various colored bars represents and concludesFor Italy and Spain, the QE programme has facilitated capital outflows by domestic investors. Elsewhere, it has not.”

This is what I concluded long ago. For discussion, please see Target2 and Secret Bailouts: Will Germany be Forced Into a Fiscal Union with Rest of Eurozone?


Joe A Mon, 09/25/2017 - 05:13 Permalink

Sounds to me that this scheme puts German and Dutch central banks exposed to the risk of other countries leaving the Eurozone and their central banks going bankrupt. Therefore, countries will be prevented from leaving the Eurozone. This is a scheme devised to further Eurozone integration.

Five Star HenryKissinger… Mon, 09/25/2017 - 06:27 Permalink

A debatr has raged about the extent to which the Target2 system is showing household wealth flight versus the flight of capital from low to high quality financial assets. Given that the flight to ‘high quality’ assets is evidently code for ‘German’ assets, the differentiation is essentially academic. Whether capital is moving to Germany as a result of household consumption of German products or whether it is moving as a result of consumption of German financial assets isn’t particularly relevant. The point is that the flow of money is massively imbalanced.…

In reply to by HenryKissinger…

falak pema Mon, 09/25/2017 - 05:41 Permalink

Will Germany be forced into fiscal union with the rest of Europe ?The answer is YES; as CHina unfolds its global role and the US unfolds in parochial kneejerk.The world changes at an accelerated pace and EU is now the balancing market between ASIAN PIVOT and AMERICAN DIVOT !

falak pema Fireman Mon, 09/25/2017 - 08:10 Permalink

Don't confuse neo-fascist knee jerks with majority vote and the bigger picture.Populism is just that for humans, a disease generator;  like rabies for dogs.And to prove my point Frauke Petry the populist AFD chairwoman has just resigned her position.She can't take the BACKSTABBING within her OWN PARTY the day after election win.She has done a NIGEL FARAGE and walked away! Rabies within her OWN party!Knives out and she doesn't want to be victim of another "night of the long knives!" 

In reply to by Fireman

Fireman Mon, 09/25/2017 - 05:53 Permalink

“Banking was conceived in iniquity and was born in sin. The Bankers own the Earth…If you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits (fractional reserve lending/fiat money].”  Sir Joseph Stamp, (1920) the second richest man in Britain and President of The Bank of England, the most powerful and influential banker in the world at that time.  Whatever happened to the bouncing bankster?…

Sudden Debt Mon, 09/25/2017 - 06:04 Permalink

this slow moving trainwreck is already moving for over a decade... how much longer? Another decade? Because nobody wants to admit anyting and everybody wants the puppetshow to continue...don't hold your breath for this...

taggaroonie Mon, 09/25/2017 - 06:32 Permalink

Dear Italy and Spain, It appears that you are a trillion euros overdrawn on your account.This exceeds the 3000 euro limit we agreed upon when we issued your credit card.Please take suitable steps to remedy the situation. Yours faithfully, Germany and the Netherlands. 

Funn3r Last of the Mi… Mon, 09/25/2017 - 07:47 Permalink

I salute you Sir for your wordsmithing abilities. I have seen "immigrants" worked into so many unrelated topics - "Cornflakes" IMMIGRANTS! "Carburettors" IMMIGRANTS! "Poikilothermic organisms" IMMIGRANTS!But now you have exceeded my expectations by managing to insert "immigrants" into a critique of ECB monetary policy with respect to Target 2. Hats off to you and welcome to the all-time hall of fame.

In reply to by Last of the Mi…

Let it Go Mon, 09/25/2017 - 07:45 Permalink

Former chief economist of the Bank for International Settlements, William White, told Bloomberg TV recently that "the system is dangerously unanchored."  the fact the Euro-zone has not addressed its banking problems is still a major issue.What stood out in my mind was his indication that central banks cannot or will not be able to solve what might be seen as a growing "liquidity problem." White pointed out that Europe's creditors are likely to face some of the biggest haircuts. This is a bit ironic coming at a time the euro has been surging. more on this subject in the article below'

MrSteve Mon, 09/25/2017 - 09:33 Permalink

Redetermination risk for Italy's new lira has been driving capital flight from Italy ever since it was obvious Italy and other depressed economies would need to leave the euro to make a recovery from the current train wreck. NPLs in eurodollars is another black hole eating the EU economy. The EU pays euros at the pump but dollars at the oil well. Eurodollar illiquidity is a major crash threat.