Debtors, primarily Italy and Spain, now owe Germany close to €1 trillion. Realistically, this money cannot and will not be paid back except by a central bank bailout.
Yet, Eurointelligence whitewashed this as no big deal.
July 9 - 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 debt 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, 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.
July 11 - There is No Target2 Conspiracy
Mark Schieritz has written a short column in Die Zeit attempting to defuse the panic that German conservatives are trying to whip up about the eurosystem's Target2 balances. Schieritz tells his readers that no, the Bundesbank has not loaned one trillion euro to southern countries, but its Target2 claim is with the ECB itself. Second, contrary to the conspiratorial claim - made by the likes of the AfD - that the established political parties are hiding the issue from the voters, the data are published by the Bundesbank every month.
On whether the Bundesbank's €1tn Target2 surplus is something to worry about, Schieritz argues that the Target2 balances are essentially fictitious, not affecting the real economy. The actual real-economy transactions that Target2 balances are a signature of have already been completed. That is the point of a payment settlement system. Of course, there would be a hole in the Target2 balances if a debtor country exited the eurozone, but central banks are not commercial banks. They could create fiat money and could plug any hole in their balance sheet if it is legally possible. However we fear that this latter argument, while wholly correct economically, won't assuage the concerns of hard-money advocates especially in Germany.
Disingenuous Claptrap or Brutal Ignorance?
Eurointelligence has commented many times that preparations can become self-fulfilling prophecies.
Oddly enough, immediately following its Target2 conspiracy rebuttal, Eurointelligence commented on Italy leaving the Euro.
Observers were shocked, shocked to hear Paolo Savona’s latest comments in the Italian parliament. This is what he said (our translation)
"They ask me, do you want to leave the euro? It could be that we find ourselves in a situation in which others are making the decision. My position is that we need to be prepared for all eventualities."
The danger is, of course, that overt preparations for a eurozone exit might turn into a self-fulfilling prophecy.
Eurointelligence knows full well the odds Italy leaves the Eurozone may be small, but they are well above zero.
If so, why shouldn't Germany make preparations for Italy leaving? Of course this heads further down the self-fulfilling prophecies road.
The Real World
Schieritz says: "The claims and the liabilities are fictional quantities. They exist virtually, in the balance sheets of central banks, not in the real world."
One can stop there knowing full knowledge that Schieritz's article is complete nonsense.
In the real world, Target2 imbalances are a measure of capital flight and loans that cannot be paid back. Even if there once was adequate capital for loans made by Italian banks, that capital vanished long ago.
Now, Italian depositors are very fearful of bail-ins and have pulled there money out of Italian banks.
That is the "real world". Real people have real fears, and they should. Anyone holding money in Italian banks is a fool. I gave the same warning about Greece well ahead of capital controls. I make the same case again now, regarding Italy.
The ECB's actions help paper over the fact that the Italian banking system is insolvent. By implication, the entire eurozone banking system is insolvent.
I will grant Eurointelligence one thing: There is no conspiracy. The numbers are pretty much out in the open.
Then again, the Eurointelligence conspiracy lead-in smacks of being a purposeful strawman argument.
Turn On the Printing Presses
I will grant both Eurointelligence and Schieritz another thing. The ECB can paper this over by printing money and giving it away to make banks whole.
Schieritz says "After all, a central bank is not a commercial bank. She prints the money herself and can simply ignore the hole in the balance sheet. If the AfD says that Finance Minister Olaf Scholz should make provision for possible losses in his household, then the question arises: For what exactly? And at what altitude?"
Excuse me for pointing out that process is exactly what I ultimately expect, and the longer this mess continues, the bigger the ultimate bailout.
I also point out that such actions are against the Maastricht on which the Euro was founded, and that such actions were Germany's biggest fear from the get go.
Both Eurointelligence and Schieritz dismiss this as if it's nothing. I am not surprised that some economically illiterate Europhile would dismiss these claims via the printing press.
I have come to expect more than a whitewash from Eurointelligence.
Mike "Mish" Shedlock