BUNDESBANK PRESIDENT Jens Weidmann has dismissed as “absurd” claims that internal imbalances in the euro payments system has potentially left Germany with an €547 billion exposure in the ongoing crisis.
The Bundesbank intervention comes amid a heated German economists dispute over whether Germany, through the ECB’s “Target2” payment system, is effectively main creditor to a second, “stealth” euro zone bailout.
“The criticism of Target2 claims is not correct,” wrote Mr Weidmann in yesterday’s Frankfurter Allgemeine (FAZ) daily. “For me, the Bundesbank’s Target2 claims do not form any risk in itself because I view a break-up of the currency union, quite simply, as absurd.”
In what he said was the unlikely case of a break-up, any losses would be distributed among eurogroup countries based on the ECB paid-in capital key.
Last week the FAZ claimed, in a leaked letter to ECB president Mario Draghi, that Mr Weidmann had expressed concerns about the implications of euro zone imbalances.
The Target2 debate began in Germany, initiated by Munich economist Prof Hans-Werner Sinn. He warns that theoretical Bundesbank claims via Target2 could become real losses should a country leave the euro zone, or the currency bloc break up. The other camp, to which Mr Weidmann now belongs, has rubbished such claims.
Explaining the payments’ system, Prof Sinn uses the example of an Irish farmer buying a tractor from a German company. The transaction payment does not go directly from the Irish to German bank but is directly via the Target2 system of the ECB, in effect a euro zone payments clearing house for euro group central banks.
In regular circumstances, with normally functioning money markets, the ECB’s Target2 system balances itself as banks lend to and borrow from each other. In the financial crisis, however, imbalances have arisen as interbank lending has dried up; banks have increasingly turned to their central banks for financing. This has left central banks in debt or credit to each other every evening at midnight when the daily balances are recorded in the ECB’s Target2 account book.
From a volume of €460 billion before the crisis, the total Target2 balance now totals €1.1 trillion. Periphery country obligations to the system have risen from one-sixth to two-thirds of the total, around €750 billion. Ireland’s Target2 obligations totalled €119.68 billion at end of January.
Prof Sinn says the Target2 imbalances reflect current account deficits in periphery countries. His claim that Target2 is, in effect, a shadow credit arrangement has been reported widely in the FAZ and the influential Spiegel Online website.
Commerzbank chief economist Jörg Krämer says of Prof Sinn’s theory: “The Target2 claims do not pose a danger as long as the currency remains stable. If the euro should break up, it could end up as an uncollectable claim.”
However, other influential economists and media outlets have accused Prof Sinn of spreading conspiracy theories. Prof Olaf Sievert, a former economic adviser to the federal government, accuses Prof Sinn of using “misleading language” to misrepresent the Target2 system as one that creates rather than merely regulates liquidity flows.
