Target2: Downplay of a “financial atomic bomb”

We should not continue to turn a blind eye to the experts’ massive public criticism as to the getting out of hand of exorbitant Target2 settlements. Already in 2011, i.e. at a very early stage, Professor Hans-Werner Sinn and Professor Timo Wollmershäuser (1) indicated in detail as to the extremely destructive risks Target2 could pose to the central banks of strong Euro countries, such as the Deutsche Bundesbank and thus the German citizens.

In one of the prominent German newspapers, FAZ, on 20 February 2012 the alternate Director General for financial market operations with the ECB, Ulrich Bindseil, defended the Target2 settlements. In the meantime, only the debts the ECB has with the Deutsche Bundesbank aggregate to approximately EUR 500 000 million - and it is likely on the increase! 5 years ago these claims were equal to cero Euros! Thus, the ECB’s debt with the Bundesbank is significantly higher than the total federal tax revenues of two years (2).

Whenever the Bundesbank loses money, the German citizens also do. In his statement, Mr. Bindseil, i.e. the ECB, wants to tell us that this outrageous debt of EUR 500 000 million the ECB has with the Bundesbank is something normal, necessary and not at all risky. According to him, we are dealing here only with capital movements (?). We can’t let these downplay activities by the ECB pass unchallenged. The heart of the question here is if the Euro system can be still maintained or not. From the point of view of an ECB staff, the answer is easy: if the Deutsche Bundesbank stops continuing its granting of loans to the ECB via Target2 and/or if Germany stops continuing its furnishing of new guarantees, it is all over for the Euro and thus for the ECB! And: the damages would have to be borne by the citizens and taxpayers!

With our brief basic statement/analysis of the issues arising in connection withTarget2 we would like to point out the dangers involved. The consequences of Target2 are described by way of example of the Deutsche Bundesbank. By analogy, these consequences are applicable to all the other national and federal banks of the strong Euro countries. The long version of our critical analysis has already been presented to the Deutsche Bundesbank.

Download this brief analysis

(1)  Prof. Hans-Werner Sinn, Prof. Timo Wollmershäuser, Target-Kredite, Leistungsbilanzsalden und Kapitalverkehr: Der Rettungsschirm der EZB - Target loans, current account balances and circulation of capital: The rescue package of the ECB (June 2011), ifo Working Paper No. 105, with numerous referrals to press publications and lectures.
(2) Germany’s national revenue in the year 2010: EUR 226 000 million, press release German Ministry of Finance, January 13, 2011