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Target2 Redux: The simple accountancy and slightly more complex economics of Bundesbank loss exposure through the Eurosystem

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  • Buiter, Willem H.
  • Rahbari, Ebrahim

Abstract

This study shows that Target2 net claims are a poor measure of Bundesbank loss exposure, and even more so of German loss exposure to the rest of the Eurozone. This is true even under plausible assumptions about a comprehensive break-up scenario that leaves Germany as the only member of the euro area and the Bundesbank as the sole owner of the ECB. In this implausible scenario, the discrepancy between the Bundesbank’s Target2 net credit balance and its likely loss exposure has two principal sources. First, the 16 national central banks (NCBs) that exit the Eurosystem (which will on balance be net Target2 debtors) and their sovereigns will not automatically walk away completely from their Target2 debts - defaulting on their debts with a zero recovery rate for the Bundesbank. Legally, the Target2 claims are not extinguished by exit from the Eurosystem by the debtor NCBs. Politically and realistically, many of the exiting NCBs would be able and willing to honour their obligations to Target2 in part or even in full. Second, in the comprehensive break-up scenario, future seigniorage revenues of the Bundesbank would likely go up, as it would be left with a larger share (in our example 100 percent) of the ownership of the ECB. Changes in German exposure to the rest of the euro area (or to the periphery) can differ in magnitude and in sign from Bundesbank exposure.

Suggested Citation

  • Buiter, Willem H. & Rahbari, Ebrahim, 2012. "Target2 Redux: The simple accountancy and slightly more complex economics of Bundesbank loss exposure through the Eurosystem," CEPR Discussion Papers 9211, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9211
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    References listed on IDEAS

    as
    1. Bindseil, Ulrich & Winkler, Adalbert, 2012. "Dual liquidity crises under alternative monetary frameworks: a financial accounts perspective," Working Paper Series 1478, European Central Bank.
    2. Buiter, Willem H. & Rahbari, Ebrahim, 2012. "The ECB as Lender of Last Resort for Sovereigns in the Euro Area," CEPR Discussion Papers 8974, C.E.P.R. Discussion Papers.
    3. Whittaker, John, 2011. "Intra-eurosystem debts," MPRA Paper 38368, University Library of Munich, Germany.
    4. Ulrich Bindseil & Philipp Johann König, 2012. "TARGET2 and the European Sovereign Debt Crisis," Credit and Capital Markets, Credit and Capital Markets, vol. 45(2), pages 135-174.
    5. Giavazzi, Francesco & Spaventa, Luigi, 2010. "Why the current account may matter in a monetary union: Lessons from the financial crisis in the Euro area," CEPR Discussion Papers 8008, C.E.P.R. Discussion Papers.
    6. Winkler, Adalbert & Bindseil, Ulrich, 2012. "Dual liquidity crises under alternative monetary frameworks," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62032, Verein für Socialpolitik / German Economic Association.
    7. Peter M. Garber, 1998. "Notes on the Role of TARGET in a Stage III Crisis," NBER Working Papers 6619, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Jean Pisani-Ferry & André Sapir & Guntram B. Wolff, . "EU-IMF assistance to euro area countries: an early assessment," Blueprints, Bruegel, number 779.
    2. Hans-Werner Sinn, 2012. "Target Losses in Case of a Euro Breakup," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(4), pages 51-58, December.
    3. Stephen Cecchetti & Robert McCauley & Patrick McGuire, 2012. "Interpreting TARGET2 balances," BIS Working Papers 393, Bank for International Settlements.
    4. Francesco Papadia, 2014. "Operational Aspects of a Hypothetical Demise of the Euro," Journal of Common Market Studies, Wiley Blackwell, vol. 52(5), pages 1090-1102, September.
    5. Philippine Cour-Thimann, 2013. "CESifo Forum Special Issue April 2013: Target Balances and the Crisis in the Euro Area," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 0, pages 05-50, 05.
    6. Francesco Purificato & Caterina Astarita, 2015. "TARGET2 Imbalances and the ECB as Lender of Last Resort," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 3(4), pages 1-28, October.
    7. Hans-Werner Sinn, 2013. "Die Target-Verluste im Fall des Auseinanderbrechens des Euro – Eine Replik auf De Grauwe und Ji," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 66(01), pages 14-24, January.
    8. André Grjebine, 2013. "L'Eurosystème: un mécanisme de transferts en faveur des pays déficitaires ? Le débat," Post-Print hal-01024818, HAL.
    9. Oliver Picek, 2015. "A national public bank to finance a euro zone government: Getting the funds for investment and recovery packages," Working Papers 1512, New School for Social Research, Department of Economics.
    10. Astarita, Caterina & Purificato, Francesco, 2013. "TARGET2 imbalances and the need for a lender of last resort," MPRA Paper 51124, University Library of Munich, Germany.

    More about this item

    Keywords

    Bundesbank; capital flight; ECB; eurosystem; imbalances; TARGET2;

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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