Comments on: Don’t worry about Target2 A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: peterfairley Fri, 13 Jul 2012 11:17:06 +0000 Felix seems to have lost the debate, but isn’t Felix of the same mind as the ECB and cooperating EU banks in this mess? So where do we stand? I don’t like that accounting definitions are so debatable.

By: JFoxy Wed, 20 Jun 2012 04:12:34 +0000 PLEASE HELP!!

By: TFF Sun, 17 Jun 2012 23:46:24 +0000 I’m not positive I’m understanding this properly, but…

“Greece has a negative Target2 balance of about €100 billion. What that means is that Greek banks owe the Bank of Greece €100 billion, which is fully collateralized; and that in turn the Bank of Greece owes the ECB €100 billion on an unsecured basis. ”

Suppose Greece leaves the Euro. The Greek banks sent their euros to the Greek central bank. The Greek central bank sends newly printed drachma’s back. What then does the Greek central bank then do with the euros?

Wouldn’t they send them to the ECB? What else would they be permitted to do with them?

By: JKH Sun, 17 Jun 2012 18:07:49 +0000 FS,

“…because the money was never lent in the first place! At no point did German taxpayers send this money to Spain, and so it’s a bit rich to say that Spain now owes this money to German taxpayers.”

In the first instance, the German central bank assumed a new bank reserve liability, ex nihilo.

Nobody assumes a liability ex nihilo without being compensated for it.

So the German central bank requires compensation for assuming that liability.

Suppose the German central bank received Euro cash (or cheque, or electronic funds) for assuming that liability.

Assume it used those funds to pay for the TARGET2 asset it acquires.

That sends the money to Spain, in effect, in return for Spain’s TARGET2 liability issuance.

So (looking through the aggregate ECB TARGET2 clearing mechanism) Spain owes that money to Germany, having issued the TARGET2 liability in exchange for funds as described.

The actual short cut is that Germany accepts the bank reserve liability in exchange for a TARGET2 asset.

But the economic effect is exactly the same as if it had been paid cash for assuming the liability and used the cash to acquire the TARGET2 asset.

By: MrRFox Fri, 15 Jun 2012 14:30:47 +0000 OK, gang – Felix is out there all by himself, sincerely believing he’s at last found the one true “free lunch”. Let’s cut him a little slack – K?

Next week he’s going to introduce us to the Fountain of Youth and the lost city of El Dorado. He shouldn’t have to be further distracted by this Euro stuff with that on the agenda.

By: basilshaw Fri, 15 Jun 2012 12:54:00 +0000 So, if I pay my salary into my bank account each month, and if my bank uses that asset to extend my neighbour’s overdrawn account each month, there is no problem because credits/debits are equal … nuts!

By: Hal9k Fri, 15 Jun 2012 08:49:29 +0000 The analysis in the article entirely misses the point.

When a Spanish depositor moves money to a German account, they get to own German financial assets. Germany, in return, gets a worthless Target2 credit which will be written off when the euro breaks up.

The after the crisis, the Spanish depositor moves their money back into new pesetas in some new European banking system. The Germans have to pay up by exporting more, and end up poorer as a result.

From this point of view it is easy to see why the Germans would want to switch of Taget2 at some point. Presumably at the logical extreme, the rest of Europe could end up owning most of the German economy.

By: m_m Fri, 15 Jun 2012 08:35:36 +0000 Felix,

Are you saying that printing a trillion Euros to meet all the various German Banks’ liabilities (*), as the Bundesbank will need to do to replace its lost Target2 assets, is just an accounting fiction with no real-world impact or consequences or even meaning at all; or are you saying that such trillion-euro-printing will have insignificant medium- and long-term consequences (and indeed, may even be good for Germany by helping keep the New-DEM down)?

If you are saying the former, you are mistaken. If you are saying the latter, the matter is open to debate, and indeed not something that should be fobbed off as an accounting (in)convenience and ignored.

(*) to the Spanish depositor who moved his money from Spain; to Bosch who shipped the washing machine to Greece

By: apeman1 Fri, 15 Jun 2012 01:51:14 +0000 I am not know for my brains, but for the life of me I can not see how Felix is right.

As I understand it, he is saying that Germany’s target 2 balance is a reflection of people pouring their money into Germany. This is obviously correct. Where he loses me is the fact that he takes it as a given that this is a good thing for Germany (or at least, a neutral thing).

It seems to me that Felix’s basic problem is that he is treating money as an asset when in fact it is a liability. The fundamental reason why people are putting their money in Germany is that they want to have claims against German institution, not Spanish ones (or whoever is the weak horse of the day). These claims against German institutions are very real liabilities. After all, everyone understands that deposits are a liability of a bank notwithstanding the fact that they are created by people moving their money into a bank.

In the USA, the way this flight to safety creates liabilities is very clear. We call it the current account deficient and its exstance increases the US’s external liablites.

Felix obscures this obvious parallel by trying to talk about how the US works internally. But this comparison does not hold water. Everyone (I think) agrees that if the PIGS stay in the Euro there is nothing to worry about on the Target 2 front. The problem comes if the PIGs switch to a different currency.

If you insist on comparing the internal workings of the states to the EU, it would be better to think about what would happen if the US broke up. If for example the west coast was about the leave the rest of America and so everyone in the West coast was pouring their money into East coast institutions. If the breakup was to occur and the west coasts left the currency union, the East coast would wind up owing the West coast all sorts goods and services (because of the claims that the money represents) and the West coast would effectively owe the East coast nothing (because the whole point of devaluation is to devalue other peoples claims on you).

Now granted the East coast can also devalue, but this creates very real costs for people on the East coast. And ditto for Germany.

By: MS001 Fri, 15 Jun 2012 01:34:41 +0000 @Felix,

TARGET2 balances have real economic value (in external debt derailing countries) and explain in a way possible losses that eg Deutsche Bundesbank would have to absorb in its balance sheet.
TARGET2 imbalance shows better that there is capital flight out of the periphery to the core, and this is dangerous. Also, periphery trade deficits and overall thesis of banks growing the dependence on the inputs threw TARGET2.
The point however is not the ekthesis on GR POR IRL or SPAIN debt.
The real point is how banks perform.
Banks (especially Greeks that i know of) for 3 years are unable to perform independently. The financing TARGET2 and MRO, LTRO, liquidity is for recycling balance sheets and stay almost unchanged.
But is like being in a gypsum.
Why? Because the nature of banking is associated with maturation. Deposits of customers can be readily available for commitment but also the banks lend to businesses and households and are committed for many years. The result is that banks often face significant liquidity risks.
The GR banks during this crisis lost more than 70 b € in deposits.
The ratio L/D for every euro in most was around 0.9-1.2 which is from the best ratios in most western countries.
But here comes the dynamics of unchanged maintenance which in some cases make things more difficult.
We witnessed a massive rescheduling in loans with cost for banks, a great increase in NPL but also the inability to finance companies, new business schemes and i m talking even for export based companies.
The banks policy was: we try to restructure loans in order to make many customers able to pay but to new loans, we say NO.
Because if they contract new loans more to those eg of 2010-11 the CAR would be in huge deterioration. So less loans than 2010 a not so substantially worst CAR for 2011 even after huge losses with PSI +!
The problem here? By reducing corporations funding especially those many thousands small family led companies -in case of Greece- we made them dissfunctional.
The most important is that a reduction in loans at 10% practically has a huge impact in GDP and reduce it at least 3-4%.
So the TARGET2 impalances might be the one side of the coin, the potentially difficult to assess, the other is the functioning lately of the Spanish banks.
Real issue for europe is to recapitalise effectively banks facing problems with the best possible terms, in order to improve the funding in real economy and gain trust.
Trust is the issue, a practical one. The mechanics of TARGET2 could be a multiexplaining tool for observation and analysis, but not a base for change especially now its structure.