July 09, 2018
German panic about Target2
The German debate on the balances of the Target2 payment clearing system continues to rage. There are two reasons for this. On the one hand, the Bundesbank's Target2 credit with the Eurosystem was over €976bn at the end of June, and is within weeks of exceeding the symbolic figure of one trillion. On the other hand, Germans have taken notice of Paolo Savona's plan B for Italy to exit the euro, which involved defaulting on Italy's external debt including its Target2 balance which is under €481bn and growing.
In this context Peter Boehringer, the AfD MP and chair of the Bundestag's budget committee, has criticised Olaf Scholz in a budget debate for making no risk provisions for the possibility of default on Target2 claims. Frankfurter Allgemeine has also spoken to Christian Dürr, the deputy leader of the FDP group in the Bundestag, who says it's about time the finance minister put on the political agenda the threat of a default on the German taxpayer. The position of the CDU group is that the situation will correct itself because of the coming end of the ECB's asset purchase programme, and trust in the eurozone's southern states returning as a result of the ongoing economic recovery.
But the FAZ insists that something needs to be done. Should the Target2 claims - currently undated, unsecured, and paying no interest - be backed by assets? How could Target2 balances be remunerated when the ECB's deposit rate is negative? And can politics interfere with how the ECB organises its payment clearing system without violating its independence?
That's all well and good, but the article is littered with gross inaccuracies and misunderstandings that frame the German debate on Target2.
Let's start with FAZ' observation that the Italian central bank does not have enough gold and reserves to back the German claims. This implies that the Italian Target2 debit is owed to Germany. But any intra-day Target2 balances between the Italian and German central bank are netted out, and become claims between the national central banks and the ECB. What the German conservatives are ultimately pushing for is either that the ECB pledge assets as security to the Bundesbank, or that Italy secures its debit with the Eurosystem.
But there's also the delirious claim that Target2, as a payment settlement system, actually allows Italians, Spaniards and Greeks to buy real estate, firms and bonds in Germany without money created at home at home either through a sale of goods and services or credit from their commercial bank. This is nonsense of the highest order. A payment clearing and settlement system does not magically allow payments to go through if the payer has no money in their account and no available credit line. FAZ implies that Target2 forces the Bundesbank to grant credit at zero interest to southerners. In actual fact, the only credit that the Bundesbank grants in the context of Target2 is to other central banks intra-day, and to the ECB on an ongoing basis. If Italians - or Spaniards, or Greeks - are buying stuff in Germany, it's because they either had the balance in their bank account or their local bank granted them credit. It this is wrong the fault lies with the Single Supervisory Mechanism, not with Target2.
We keep wondering whether the German economists and MPs that FAZ talks to are actually advocating that the Bundesbank stop clearing incoming payments from Italy. This, by the way, is basically what the Greek capital controls amount to. But those were the result of ballooning emergency liquidity assistance from the Greek central bank to its commercial banks. That is, the locus of the lack of trust was the Greek private banks. What we're talking about here is to shut out the Bank of Italy from the Eurosystem.