Does Germany bail out Southern Europe? Or did Southern Europe bail out the Buba
One of the imbalances of the Euro system are the Target2 claims. These claims are a kind national, non-government American Express credit card debts owed to foreigners which were paid down using the overdraft facility of the national private banks at the national central bank. To be able to do this, the national central bank borrows from a foreign national. These imbalances are large: many hundreds of billions of Euro. Interest rates on Target2 debts are low but as the total amount of money is huge total interest still is quite a bit of money. Germany is the main ‘foreign’ national bank. And the Bundesbank did earn a huge amount of interest:
I.e. about 14 billion in three years time (I could not find Target2 interest income data for the Netherlands, but it may have been around 3 billion). Money paid by the indebted nations – a price they pay because central banks basically took the loans of the ‘German’ banks on their balance sheets (if they had not done this, the ‘German’ banks would have imploded). Where did this money go? In 2012, almost all the profit of the Bundesbank was added to the reserves of the Bundesbank (talk about increasing deflationary strains – that’s what you have to do in good times, as a central bank). But in 2013, ‘The profit of €4,591 million is transferred to central government‘. This profit is of course not only caused by gross Target2 interest income. But the point: at this moment there is a lot of noise about Northern countries which are bailing out southern countries, despite the fact that most of the money is only used to roll over existing debt, there are i.e. no new funds needed. Remarkably, however, the real stream of income (as opposed to a financial flow, i.e. loans which have to be paid back) is from south to north. And as Target2 debt is, according to professor Hans-Werner Sinn, ‘new’ money, the opportunity costs of the Target2 credits are basically zero… Indeed a kind of free lunch, for the northern countries.
It’s interesting to compare the situation of Greece with the situation in the USA, where the central bank would have bought the debt (i.e. solving the default problem and driving down interest rates) and where Target2 kinds of interest flows are going to the national government in stead of a foreign government…