Home > Uncategorized > Target2 imbalances, roll-over risk, the Euro and the preferential treatment of private debt in the Eurozone

Target2 imbalances, roll-over risk, the Euro and the preferential treatment of private debt in the Eurozone

One of the manifestations of the Euro crisis were and are the Target2 imbalances, large debts owed by Eurozone periphery countries to the core countries (graph).


Recently I understood that even well informed people still misunderstand these imbalances. They were not caused by new net lending and borrowing. The Target2 imbalances effectively saved the Euro when ‘private’ banks did not want to roll over their (large) short-term loans to southern Europe anymore, scrambled for the exit and the European system of central banks provided liquidity. Instead of owing large debts to French or German banks, southern European countries (including their national central banks) now owe large debts to northern European central banks and the ‘private’ banks are of the hook. It’s that simple.

Target2 effectively takes care of ‘country risk’ and ‘sudden stops’ inside the Euro area. The ATP’s have to continue to work. Rolling over government debt is of course left to ‘the markets’ or complicated, expensive, chains attached bail-out funds which effectively means that private debts are given preferential treatment, in the Eurozone. Aside – even a Eurozone country with a sizeable surplus on its current account can, when it still has a net international debt position, need to draw on its ‘Target2 account’ whenever private banks for whatever reason do not want to roll over this debt anymore.

  1. May 22, 2014 at 8:34 am

    Reblogged this on ..::popular spanish practices::.. and commented:
    In spain we got a public debt of nearly 100% of our PIB … that’s perhaps why private debt got a preferential treatment, at least in our country

  2. Johan
    May 22, 2014 at 2:43 pm

    Interesting. The question is what would happen if southern Europe defaulted on its debts? How would it affect the northern central banks? Are there any precedents?

  3. May 22, 2014 at 8:46 pm

    Presumably, though, these function as reserves. If a €100 in bank money moves from Santander to Commerzbank, Santander pays Banco de España €100 in BdE reserves, BdE pays Bundesbank €100 in Target2, and Bundesbank pays Commerzbank €100 in Bundesbank reserves.

    What happens if the Euro fractures along the Rhine and Target2 balances become just numbers? Presumably nothing. Commerzbank still has €100 of Bundesbank reserves. Or is Bundesbank so wedded to their gold standard myths that they would declare themselves €100 insolvent?

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