Sonntag, 21. Oktober 2012

Weitere Überlegungen zur Target2-Debatte: Zum Blogposting "Right on TARGET" von "Rebeleconomist"

The following text is a response to the entry "Right on TARGET" (already of July 6, 2011, but with a discussion thread active until Febr. 2012) in the blog "Reserved Place" by the blogger "Rebeleconomist". My commentary was too long (some 15.000 instead of the allowed 4.096 signs), so I posted only the beginning in "Reserved Place", and the whole thing here.

"Rebeleconomist" doesn't seem to have been active lately, so possibly I won't see any response. And it is rather unlikely that many people will read my present entry  here. However, it has been useful to me to start sorting my ideas, and to give the highly deserved credits to Bernd Klehn for his discovery (see below).
So whatever will happens to this text, it definitely has not been a wasted effort for me.

For German readers unfamiliar with the terminology:
NCB = National Central Bank (like Bundesbank for Germany).
ECB = EZB (European Central Bank = Europäische Zentralbank)


Hello Rebeleconomist,

let me start my commentary with a few excuses
- for coming late into this debate
- as a German, for my English being less than perfect
- as a layman, for my command of technical terminology leaving room for improvement and, possibly,
- for adressing subjects that may already have been clarified in later postings of yours or elsewhere in this very widely ramified debate.

I did haphazardly read a few blogpostings on the subject while the discussion was raging in 2011, but now I bought Prof. Sinns lates book "Die Target-Falle" (The Target-Trap) with the intention of writing a critical review. This necessity occured to me when reading a extract "So wurden die Euro-Retter erpressbar" on the FAZ-Website (Link for anyone understanding German: Strangely enough, Sinn still seems to hold a few misconceptions, even though you would imagine that no stone has been left unturned in this international debate with its broad participation on all levels and some illustrious contributors.

The more I dig into it, the more thrilling the whole subject is becoming for me; much more so than any whodunit.
But since the subject seems to be complicated even for people that have studied economics, I decided I'd better try to get an overview of the internet-debate, before even starting with Sinn's book.
And that's how I came across (via Olaf Storbeck) your present entry.

Many reader-commentators have rightfully applauded it, but none of them has give a reason why "that's quite a post".

What distinguishes it from pretty much all other approaches is your uncompromising step-by-step analysis of the flows of money etc. Your text doesn't suffer from any gaps, which not only sometimes confuse the readers of other contributions, but also the authors. Not infrequently they seem to jump from abstraction to abstraction, and do get entangled themselves in this maze.

So while I already did have a pretty realistic understanding of the whole Target2-question, reading your blogpost has reassured me and put my reasoning on a more secure basis: thanks for that!

One insight I take from you, which may not be crucial but certainly is interesting, is the fact that the retreat of, say, German money from, say, Ireland can be described in TWO ways:
- Obviously as an intended repatriation of capital 'back home'.
- Less obviously, as a crowding-out of German banks from refinancing the Irish by the ECB as an unfair competitor (operated with subsidised interest rates, as you explain very clearly).
Allow me to make a few remarks, for discussion or not, on a rather broad range of T2-aspects.

A) One point, which not everybody seems to understand, but which you have emphasized beyond doubt, is (part of) the risk situation. It is not primarily the quality of the collateral that poses a risk for the Eurosystem (NCBs + ECB), but the solvency of the banks. The collateral is only, so to speak, the 'second line of defense'.

B) Why do I say "part of the risk situation"?

Well: This is one point that is misunderstood, oder mingled up, in most of the debate (the part of it I've read so far) and is not distinguished even in your posting. There are TWO very distinct risk scenarios, and those who are not aware of it will never manage to understand what Sinn's worries are all about. (But sometimes I wonder, whether even Prof. Sinn himself doesn't get them mixed up at times.)

ba) If the Eurozone remains intact, there is "only" the counterparty- and collateral-risk.

bb) If the Eurozone breaks up (partly or wholly), the exact nature of the risk will largely depend on what agreements about the risk distribution will be made.

The most logical approach would be to re-transfer the NCB-ECB relations back upon the national level. This would mean that, say, Germany would 'recover' it's original claim against, say, the Greek NCB.
Being that this part of what is presently booked as a BuBa-claim against the ECB actually consists of the surplus of German goods and services that were exported to Greece, and of claims of Greek citizens to German banks, it is only fair that the BuBa (Germany) should receive the pertinent counter-claims against the Greek NCB.
(If any other arrangements were made, like the mutual debts cancelled, or redistributed according to membership-share, then clearly Germany should freeze all bankholdings of foreign nationals! But I don't think this would happen, since it should be quite obvious that this type of distribution would be grossly unfair to the surplus-countries.)
An interesting question then would be what to do with the counterparty risk. Beeing that it was incurred (or shared later - that's a matter of semantics) jointly by the Eurosystem as a whole, the debtor-countries might push for  a continuation of the joint liability (or is it "joint and several liability"?).
However, as I'm going to demonstrate below, this would neither be necessary nor desirable, because this risk could and would be shared via another channel.

So what then about the prime risk, the T2-balances? As early as June 16, 2010 (i. e. long before Prof. Sinn was put on track by Helmut Schlesinger, retired ex-president of the Deutsche Bundesbank) a certain Bernd Klehn (a very active reader-commentator on economic questions) had written (
"Das Eurowährungsgebiet ist schon lange (seit 2007) eine Transferunion. Nur hat es keiner lauthals verkündet. Wie sonst käme die Bundesbank dazu, den anderen Euroländern 200Mrd. zu 1% an Liquidität zur Verfügung zu stellen? Dieses kann nur den Grund haben, den Euro mit deutschem Kapital zu retten. Herr Stark weiß es besser. Schade, dass auch er versucht uns hinters Licht zu führen." (The ECU has been a transfer union ever since 2007, but nobody has told us about it. Why else would the BuBa make available 200 Mrd. € liquidity for other eurozone-members at 1% interest? The only reason for this can be to save the € with German capital. Mr. Stark knows better. Too bad that even he is trying to deceive us.)

This reader-commentary (# 2) was made on a ZEIT-Interview with Jürgen Stark, then the (German) chief economist of the ECB "Es gibt keine Inflationsgefahren" (No danger of inflation - had said: "Die Währungsunion ist und bleibt eine Stabilitätsgemeinschaft. Sie wird keine Transferunion werden." (The currency union is and will be an association of stability. It will not turn into a transfer union.) (See also his commentaries ## 8, 9 with a BuBa-confirmation and exact figures!)
This I've only mentioned to give Bernd Klehn the highly merited credit for priority, even though it may not count in economics, since the statement was not made in a scientific paper.
I'm sure though that, had the debate been in English, the whole T2-discussion would have started immediately. Us German readers, alas, didn't grab the significance of the T2-imbalances then.

We (shame on us!) even didn't get it when Klehn, in a reader-commentary to the article "Danke, wir können nicht klagen!" ('Thanks, no complaints', about the amazing comeback in profits for the american financial 'industry') ( in the ZEIT-Blog "Herdentrieb", made the following statement (# 100):
"Die Bundesbank hält im Augenblick ca. 500Mrd. von den 1 Billion Nettoauslandsvermögen. ..... Jedenfalls sind den anderen Euroländern kurzfristig 321 Mrd. zugeschaufelt worden, weil deren Finanzmärkte nicht funktionieren. ... Insgesamt würde ich der Bundesbank dringend raten mehr die Marktkräfte wirken zu lassen. ... Fernerhin hätten so die Finanzmarktakteure endlich zum Teil die Konsequenzen aus ihrem Verhalten zu tragen. Es sei denn die Bundesbank will eben dieses nicht und uns eine noch viel größere Last aufdrücken, als wir sie schon über das Eurorettungspaket eingegangen sind."
(At present, BuBa is holding 500 bio. of 1 Trillion net foreign assets. ... At any rate, other countries in the Euro-zone have received 321 bio. from the Buba, because their financial markets are disfunctional. ... On the whole, I would strongly advise BuBa to give more leeway to market forces. ... This would also imply that investors would have to bear the consequences of their behaviour. But maybe the BuBa wants to avoid exactly this result and burden all of us with a package even more onerous as the Euro-rescue-package.)

[Off topic here, but stupendously insightful, are his postings # 30, 83 etc., or, on the dire prospects of a funded pension system, # 59, 80, 84(!) etc.!]

Again in the "Herdentrieb"-Blog, for the entry "Scharf, schärfer, Stabi-Pakt" (, Klehn made the following (relevant) comments:
# 5 (Oct. 26, 2010): "Die Bundesbank hat, um die notwendige Liquidität in anderen Euroländern herstellen, im Augenblick diesen 321Mrd. über Target2 zu einem Prozent zur Verfügung gestellt. Der Aufkauf von Staatsanleihen über den Eurorettungsfond sind im Verhältnis dazu Peanuts." (At present, BuBa has, to ensure the necessary liquidity in other Eurozone countries, made available 321 bio. € via T2 at 1% interest. Purchases of state bonds via the Euro-bailout-fund are peanuts in relation.)
See also, among others # 28, 31 (!), 55, 57, 59 (here, for the first time, the term "Devisenreserven" - currency reserves!), 60 (!! here, we also find the idea of '+ Greece, ./. Germany', but this seems to have been corrected in # 65), 69 ('crowding out' of private foreign funding by ECB-funding, like you said, sort of), 74 (automatism: "dass Deutschland sich dagegen kaum wehren kann" - nothing much that Germany can co about this development), 92, 94.

And now, after a long digression, I'm finally coming to the core of this part of my argument: nature of risk for BuBa in case of Eurozone breakup.
Actually, I have worked out this aspect ( independently of Klehn, but only as a result of the debate.
Klehn has seen pretty clearly even then, what hardly anybody understands even now:
Quote # 97: "Die Bundesbank-Forderungen bestehen gegenüber den anderen Euro-Zentralbanken. Die Forderungen sind via Euro-Tender oder Target2 entstanden. ..... Für mich bedeutet dieses praktisch ein Halten des Euro über den eigenen Geldschöpfungsanteil hinaus als “Devisenreserve”, wobei die Bundesbank keine andere Wahl hatte als diese Position auszubauen. Diese “Devisenreserve” wird mit 1% verzinst. Diese “Devisenreserven” dienten der Finanzierungen der Leistungsbilanzdefizite der abgebenden Länder, die der freie Finanzmarkt zu den herrschenden Konditionen nicht vornehmen wollte. Frage bleibt, wie kommen wir wieder von den für uns nutzlosen “Euro-Devisenreserven” wieder runter oder müssen wir diese irgendwann als Staatsschulden ausbuchen?"
(BuBa has claims against other Euro-NCBs. Claims originated via Euro-Tender or T2. In my opinion, this amounts to BuBa holding a currency reserve, which BuBa could not avoid accumulating and which yields 1% interest. These 'currency reserves' have been financing the current account deficits of the debtor countries. Question remains: Can we get rid of those 'Euro-currency reserves' that are useless to us or shall we have to book them out one day as state debt?)
(More of his comments in 99, 103, 107, 109.)

However, Klehn [and likewise Prof. Sinn??] misses something when he says (109) "@Rebel Dann haben wir schon die Transferunion und sollten die 310 Mrd. in Staatsschulden umbuchen und somit das Nettoauslandsguthaben um diesen Betrag verringern. Genauso wie es mit den anderen Finanzmarktverlusten via UK und USA passiert ist." (Then - i. e. if a unified currency system with pretty much equal living standards is intended - we already have the transfer union and should reclassify the 310 bio. € in state debt, thereby reducing our foreign claims. Just like happend with the other losses on the financial market via GB and USA [guess he's referring to the necessary refunding of German banks due to GB- and US-losses])
In case of a breakup those "currency reserves" would not be lost (depending of course, like I said, on the particular arrangements being made). Even if, say, Greece went bancrupt, that money would not be lost. Because the Target-balances represent German claims against the Greek economy, NOT against the Greek state (at the moment I'm not sure whether even Prof. Sinn clearly distinguishes this).
It does not matter whether Greece or Germany would leave the Eurozone: Even if Greece left, we'd have to agree to (at least:) our public demands being transfered (1:1) into 'Neo-Drachmas', since it would be impossible to burden the Greek economy with full value Euro claims.

Where is the benefit for Greece if I make a 1:1 change? Well: the very next day (a Monday, of course!) the drachma would be down, say, 30%. And THAT, in my opinion, is essentially the German risk.

Now what about possible later bank defaults in Greece? The Greek NCB being independent, it could recapitalise the Greek banks either directly or via the state, in both cases, of course, by printing money. Thereby, the Drachma would devaluate and BuBa would incur further losses according to Greek currency depreciation. So in the end, we would pay one way or another, not only for the present overvaluation of "Greek Euros", but indirectly even for future bank insolvencies in Greece.

With my commentary being rather lenghty already, I only summararily adress a few other aspects:

- Since interest-yields are being divided, I assume that German BuBa is already subsidising other countries to the tune of 2 -3 (?) Billion € p. a.

- It is, in my opinion, an extremely unsatisfactory aspect about the whole debate that it is centered around the NCB-ECB-NCB relation. There must, however, be limitations on the business level of commercial banks as to how much money the NCB of their respective country can "print". I guess that's what the efforts of Spain, France etc. are all about, to drag Germany (down) into a Eurozone banking union with direct recapitalisation of banks via ESM, i. e. through ("our") tax money. I'm hoping to shed a little more light on this dimension when I'm through with my reading program.
However, it would be highly desirable if real experts would publish papers on that.
One important aspect then would be to distinguish, when it comes to the question of insolvent banks, between
a) illiquidity and
b) overindebtedness.
Whereas a) is clearly a case for the ECB as lender of last resort to help, lending to 'b)-banks' would be a violation of the ECB statue. I personally would consider such action as criminal, even if it may not be punishable under German law. However, I have the very strong suspicion that the ECB is already doing exactly that: Borrowing to over-indebted banks in Greece, Spain, Cyprus and possibly Slovenia.
It would certainly be interesting to learn what opinion/information (if any) you and/or other readers might have on this particular aspect, too.

Supplements Oct. 22, 2012

Thanks to a reader-commentary by the abovementioned Bernd Klehn for this blogpost by "egghat" I found the article "Liquidate or liquefy?" ( by the well-know economist Daniel Gros. Without mentioning the Target2-mechanism, he gives a good description and demonstrates a keen problem-perception of the mechanisms behind Target2. Highly recommended reading for anybody interested in the subject!

Wenn man den SPON-Bericht "Auf schmalem Grat" vonMatthias  Brendel und Christoph Pauly vom 23.05.2011 liest, kann man auf die Idee kommen, dass das ganze Europäische Währungssystem mittlerweile zu einer Art krimineller Vereinigung verkommen ist.
Notenbanken haben in größerem Umfang Sicherheiten weitaus zu gut bewertet. Es gibt auch keine Kontrolle der Europäischen Zentralbank über die nationalen Notenbanken. Und die haben natürlich das Wohlergehen, also die möglichst billige und möglichst umfangreiche (d. h. bezogen auf die Sicherheiten eine möglichst abschlagsfreie oder jedenfalls abschlagsarme) Liquiditätsversorgung der Banken ihres Landes im Sinn.
Ganz abgesehen davon, dass auf diese Weise das Vermögen des Europäischen Währungssystems gefährdet wird (was den Straftatbestand der Untreue erfüllen könnte), kann das auch den Wettbewerb innerhalb der Eurozone verzerren.


ceterum censeo
Die Steuertöpfe quellen über -
Doch für Verkehr und Bildung ist kein Geld mehr über?
Kein deutsches Geld für Eurozone:
Wir leben besser "Eurotz-ohne"!
Textstand vom 28.11.2012. Gesamtübersicht der Blog-Einträge (Blotts) auf meiner Webseite
Eine vorzügliche, laufend aktualisierte Übersicht über die Internet-Debatte zur Eurozonenkrise bietet der Blog von Robert M. Wuner. Für diesen „Service“ ihm herzlichen Dank!
Für Paperblog-Leser: Die Original-Artikel in meinem Blog werden später z. T. aktualisiert bzw. geändert.


  1. Thanks for your interest in my post, Cangrande. I like to write quite detailed and comprehensive blog posts, and have not had time to write like that recently, but I continue to take notice of comments on my old posts and to read and comment on more influential blogs (eg in the last week, on this post: ). However, none of what I have learned since I wrote my post changes my mind; I still agree with Hans-Werner Sinn that the Bundesbank's TARGET2 credit exposes Germany to a risk of significant loss.

    I was interested to hear from you that Hans-Werner Sinn has written a book on TARGET2. I hope that this increases awareness and understanding of the TARGET2 issue in Germany, since the Bundesbank's exposure could quickly increase further on renewed fears for the future of the euro, especially if that focussed on Italy. Hopefully, the book will be available in English before long. I was also interested to read about the contribution of Bernd Klehn, who seems to have understood the TARGET2 risk to Germany even earlier than Sinn.

    My categorisation of the TARGET2 risk scenarios differs from yours. If the eurozone stays intact, as you say (your scenario ba) there are risks arising from the counterparties and collateral involved in ECB loans, but these are nothing to do with TARGET2 per se. These risks would exist whether or not the reserves created by these loans had been transferred between countries. Moreover, any such losses would be shared between member states according to the ECB capital key, so that kind of risk is a relatively minor worry for Germany. The risks associated with TARGET2 are only realised in the event of a break-up of the eurozone. This risk is that any country leaving the eurozone with TARGET2 debt repudiates that debt, perhaps as part of a default on all its sovereign euro debt. And since the loans made on behalf of the ECB by the NCBs are legally owned by the NCBs, a country leaving the eurozone can default on its TARGET2 debt even if its banks do not default or their collateral proves adequate. The leaving country might hand over these ECB loans to the remaining eurozone members with the intention of settling its TARGET2 debt, but these loans might not have much value if they were, for example in the event of Greece leaving the euro, euro denominated loans to Greek banks collateralised by Greek government bonds.

  2. A eurozone break-up may be usefully subdivided into two further scenarios. In the event of a single small country like Greece leaving the eurozone and repudiating its TARGET2 debt, the loss should be shared between the remaining countries according to their (increased) share of the ECB capital (presumably the defaulting country would lose its share of the ECB capital). Call this scenario bb1. In this case, the risk to Germany should be bearable, being shared with other countries and unrelated to the size of the Bundesbank's TARGET2 credit. I doubt that it would be any advantage to Germany to "recover its original claim against the Greek NCB" in such a situation. The big worry for Germany arises from a complete breakdown of the eurozone in which all the TARGET2 debtors repudiate their TARGET2 debts. Call this scenario bb2. The problem for Germany in scenario bb2 is that the Bundesbank holds few of the ECB loan assets, but a large share of the TARGET2 credit. Germany might hope that, say, France might agree to share some of the losses, but this might be politically difficult for France, especially when many commentators would blame Germany for the collapse of the eurozone because of its current account surpluses and relatively hard line with indebted peripheral countries. In the event of such an uncooperative break-up of the eurozone, Germany does have an intra-eurosystem liability worth about €200bn relating to its excess share of euro banknote issuance which it could offset against its €700bn TARGET2 credit, but Germany still has a large net asset position to lose.

    I disagree that this net intra-eurosystem asset position is a claim on, say, the Greek economy. It is a claim on the Greek NCB and hence the Greek state. You are probably right though that the Greek state would continue to accept a claim owned by the TARGET2 creditors, redenominated in new drachma and supported by redenominated ECB loans to Greek banks, to retain some goodwill with its former eurozone partners. And if so I agree that this claim would effectively become part of the German foreign exchange reserves. But simply redenominating both sides of Greek banks' balance sheets would not make the banks solvent, so I think you are right that the Greek NCB would create a lot of new drachmas to recapitalise Greek banks and quite possibly to lend to the Greek government, so these new drachma reserves would probably rapidly depreciate. Germany would still sustain a large loss.

  3. You mention the possibility that Germany could freeze foreigners' deposits in German banks, but dismiss it. Actually, I could understand if Germany did consider taking some action against deposits held by nationals from countries leaving the eurozone. Much of the most recent growth in the TARGET2 imbalances, especially from Spain and Italy, may well reflect attempts by foreigners to avoid redenomination losses on their deposits. To deter further deposit flight, Germany could announce that, in the event of a country leaving the eurozone, its nationals' deposits with German banks would be redenominated into their new domestic currency. The likely depreciation of this currency would benefit German banks rather than the German state, but the state could appropriate this gain to offset its TARGET2 loss by a windfall tax on German banks. However, I expect that Germany would consider that the reputational damage of effectively forcing German banks to confiscate part of foreigners' deposits would not be worth the gain.

    Unfortunately, as long as the future of the euro is in question, I can see no way for Germany to stop its TARGET2 exposure continuing to grow, without disrupting monetary union and offending its indebted eurozone partners. I agree that much of the present ECB lending (not to mention emergency liquidity assistance loans made nominally at the NCB's risk but nevertheless creating euro reserves liable to be transferred to other countries) represents support for essentially insolvent GIIPS country banks and even, via their banks' use of domestic government bonds as loan collateral, indirect lending to the indebted sovereigns themselves. This should have been curtailed by the ECB collateral rules, which would have forced a eurozone crisis earlier when less money was at stake, but with the creditor countries being in the minority on the ECB governing council, they have been unable to prevent these rules being relaxed to avoid a credit crunch in the GIIPS. I think if Germany wants to protect itself, it has to unilaterally, or with a small group of countries with TARGET2 exposures of similar significance to their economies such as the Netherlands, Finland and Luxembourg, threaten to leave the eurozone unless the system is reformed. Besides tightening collateral standards, they might impose ceilings on TARGET2 balances so that euros may still be transferred out of a country at its TARGET2 deficit limit, but only as allowed by inward transfers. If this means an end to true monetary union, so be it, but I would dispute the rhetoric that a monetary union means that one euro should be worth the same in all eurozone banks; a euro in a bank account is a liability of the bank, not the union's monetary authority.

    Although I would support UK membership of the euro given reforms to stop membership becoming an open-ended commitment to effectively lend to other eurozone countries, I am glad that the UK is not presently a member!

  4. Tank you for taking such detailed interest in my musings about the subject, RebelEconomist. It looks to me, like we are not far apart in our assessment of the present calamities:

    - In case of Eurozone-breakup, treatment of T2-Reserves will be a matter of negotiation.
    - One way or another, Germany must stop the Southerners' piling up of debt.
    - And yes, I'd also be extremely happy if Germany was not a ECU prisoner - or would pluck up the courage to escape from it.

    However, I can't visualize any kind of reforms that would make a monetary union with unequal partners viable.