So perhaps the Germans are helping to fund all these European debt purchases after all…. just very quietly.
- Involuntary lending is what happens when your teenager figures out how to charge stuff to your credit card. The kid promises to pay for the purchases but never gets around to it, so your involuntary loan keeps getting bigger. At some point it dawns on you that you might never get your money back.
- Something similar is happening in Europe, except the dysfunctional family consists of central bankers, with Germany’s Bundesbank in the role of aggrieved parent. The figures are hard to find, policymakers don’t like to talk about them, and the accounting is far from sexy. Outside of Germany, headlines have been few. But the numbers are huge—so huge that they may be one of the biggest factors in whether the euro zone hangs together or falls apart.
- The term to remember is Target2. It’s the name for the European Central Bank’s suddenly important interbank payment system, which before the crisis was just a lowly bit of financial plumbing.
- The bottom line: Germany’s Bundesbank—BuBa for short—has quietly, automatically lent €495 billion to the European Central Bank via Target2. That lending has balanced correspondingly huge borrowings from Target2 by the central banks of weaker nations including Greece, Ireland, and Portugal—and lately Spain, Italy, and even France.
- They are technically “claims,” not loans. To find them you have to root around in the footnotes of the reports of the 17 national central banks of the euro zone.
- If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire €495 billion claim. That’s more than $650 billion. It is 60 percent bigger than Germany’s annual federal budget—and larger than the lending under the European Financial Stability Facility and other aid programs that have received more scrutiny.
- Germany’s plight gives it an incentive to keep the euro zone intact. “If the euro breaks up then the whole claim is under risk,” Hans-Werner Sinn, president of the Ifo Institute, a Munich-based economic research group, says in an interview. Sinn, the first economist to focus attention on the Target2 imbalances earlier this year, wrote in a November research paper, “This may be the largest threat keeping Germany within the Eurozone.”
- The transformation of the Bundesbank’s balance sheet through this slow-but-steady process has been stunning—and to hard-money Germans, sickening. At the end of 2006, Target claims represented just 7 percent of the Bundesbank’s assets. By this October they represented 64 percent, according to data compiled by economists Aaron Tornell of the University of California-Los Angeles and Frank Westermann of Germany’s University of Osnabrück. The collateral the ECB holds to back those loans is primarily the sovereign debt of the euro zone’s weakest nations. It’s a far cry from the gold that’s the Bundesbank’s second-biggest asset (17 percent).
Follow the BW link for the rest of the story.
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