Home > Uncategorized > ‘Made (and financed) in Germany’: the bank run on the periphery countries

‘Made (and financed) in Germany’: the bank run on the periphery countries

Update: a very interesting new VOXEU article from Sinn on this.

A. He shares all the ideas below – except that he does not seem to be able to grasp that these debts already existed before Target made them visible, even though he writes that they arose: “because Dutch and German commercial banks were reluctant to renew their interbank credit”.  And he still neglects the capital account! What he writes about the current account is only part of the origin of the ‘interbank credit’. Weird.

B. Now the interesting part: he shows that in the USA the same thing happened! When banks, post-Lehman, became reluctant to renew their interbank credit the same situation between the 12 Federal Reserve districts arose – at about the same rate as in the Eurozone. But in the USA there is a special financial ‘cake’, in which each of the districts owns a slice, and when one district runs up huge debts (in the Eurozone for instance Italy vs. Germany) – part of its slice is transferred to the other district (Sinn however proposes to transfer Greek real estate to Germany, honest…).

C. In essence this of course means that German banks have been able to transfer their loans to the public sector, i.e. the ECB, which had to take these on to prevent a disorderly default of Greek and Spanish banks, just like the Fed did.

 

from Merijn Knibbe

When we look at money supply in countries like Ireland and Greece it’s clear that some kind of bank run is going on (graph 1 and 2, updates of graphs posted earlier on this blog, year on year money growth, % changes. Additional months have been added, money supply in Ireland has been revised downwards with about four percent for the last months of 2011).


Despite this bank run situation, the German economist Hans-Werner Sinn has advocated to limit access of these countries to the ‘Target’ system, more or less the system of checking accounts used by the Central Banks of the Eurozone countries to settle international payments. According to Sinn, these ‘checking accounts’ were surreptitiously used as if they were a kind of ‘lender of last resort’ facility of the system of Eurozone Central Banks which, according to Sinn, hampered economic discipline and austerity and prevented a turnaround of the current account deficits of these countries as they were used to finance current account deficits. Mind that, at the same time, unemployment in Spain increased to over 20%, consumption in Greece had already declined with 30% and the amount of money in Ireland had already dwindled with about 30%… But more of this kind of so called austerity was needed, according to Sinn.

And indeed: the periphery Central Banks were running up huge debts on these accounts, which were mainly financed by … the German Central Bank! There has been quite some discussion about this, manly stating that Sinn was talking nonsense – but that could not take away the growing uneasiness about the indeed large deficits on these ‘checking account’. Where was this money going to? Two IMF economists have now cracked this case.

Their method was pretty simple, not to say basic. Unlike Sinn, they did not look at just the current account, but also, as Sinn should have done in the first place, at the whole Balance of Payments, including the financial and the capital account. Oops, economics 101 once again.

It turned out that the Target debts did not finance the current account deficits but the bank run mentioned above (which shows up as deficits on the financial and the capital account). German banks repatriated their money, which was financed by the periphery banks by drawing on the Target accounts, which was financed by the German Central bank, which was indirectly financed by the money repatriated from the periphery countries…

This probably prevented, by accident, the implosion of the Euro.

  1. Pavlos
    March 9, 2012 at 3:25 pm

    Excuse this semi-informed question: If an economy shrinks and credit shrinks, so that private lenders repay their loans but don’t take new ones, won’t the M1-M3 numbers shrink? Is that a significant contributor to the fall?

  2. March 9, 2012 at 7:12 pm

    This, sort of, reminds one of the German WWI “reparation” payments to the war victors (including the US) which were borrowed from the US. (Americans were left holding the bunny at the end of the day)

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