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Tuesday, March 27, 2018

Target2 Claims Revisited

Target2 is the cash management system which the ECB uses in order to settle balances among the banking systems of the Eurozone member countries. If a national banking system transfers more money abroad than it receives from abroad (e. g. Greece), it builds up Target2 liabilities with the ECB system. If a national banking system transfers less money abroad than it receives from abroad, it builds up builds up Target2 claims with the ECB system (e. g. Germany).

The miraculous world of Target2 was revealed to the public in February 2011 by the German economist Hans-Werner Sinn. This is how the tale goes: Hans Tietmeyer, a former President of the Bundesbank, was reviewing the Bundesbank's balance sheet over the Christmas holidays and he came across a rather large asset position, i. e. Target2 claims, which he didn't know what they were. Thus, he asked Sinn about it but, off the bat, Sinn did not have an explanation, either. Sinn then researched the subject and the net result has been a never-ending debate about the risks associated with Target2.

The below table shows the development of Target2 balances of the most significant countries since 2008 (details are here):

Target2 Balances (BEUR)
Belgium Germany Greece Spain Portugal Italy Lux
2008 -104 115 -35 -35 -19 23 42
2018 -20 882 -58 -399 -83 -433 196

Belgium has significantly reduced its (originally quite high!) liabilities from minus 104 BEUR to minus 20 BEUR whereas Portugal has increased its liabilities from minus 19 BEUR to minus 83 BEUR, a very large figure compared to the size of its economy. Greece has increased its liabilities from minus 35 BEUR to minus 58 BEUR, a rather moderate amount when considering what Greece has been through (at one point during the crisis, Greece's liabilities had exceeded 100 BEUR!).

These countries - like all the others - are only sideshows when comparing them to the truly big players: both, Spain and Italy, increased their respective Target2 liabilities by over 400 BEUR (!) since 2008! The magnitude of these figures is mind-boggling. To illustrate: through a combination of current account deficits, capital flight, QE, etc., the banking systems of Spain and Italy lost over 400 BEUR each in liquidity during the last decade!

"For every credit, there must be a debit" - this we learned in Accounting back in school. The debits of Target2 are in Germany, Luxemburg (particularly relative to its size) and the Netherlands (plus 114 BEUR, up from minus 19 BEUR). When Sinn first uncovered the secrets behind Target2 in February 2011, Germany's Target2 claims were 326 BEUR and Sinn considered this as coming close to the end of the world. Now, Target2 claims are almost 3 times as high. Inconceivable from the viewpoint of only a few years ago but an accepted fact today.

How high can Target2 claims go before they system breaks?


  1. So, let's say the next global crisis hits in a year from now and the only way to shore up Italy is to increase its Target2 liabilities from 400 Bil. euros to 800 Billion.

    In such case, Germany receives an even bigger but fairly uncllectible Target2 credit and life goes on until the entire global system debt which is 300% of the global GDP already goes bust.

    I would say within the next 5 years the global finance system will experience a major crisis from which it will be unable to recover. And creditors will end up with some worthless paper credits which will be written off as part of a global reset.


    1. To keep accounting principles straight I meant to say "fairly uncollectible German Target2 claims". The credits are a benefit to the borrowers of which Germany is not one of them.


  2. TARGET2 "merely reflects persistent imbalances in current accounts and capital accounts"?

    Current account in 2008 for Greece was around 30bn deficit, but today is less than 1-2bn.

    Or what Hans-Werner Sinn suggested.

    And TIPS(retail payments ecosystem) as a part of TARGET2