In 1999, TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) was introduced as a payment system for the EURO. In 2007, it was replaced by TARGET2. TARGET2 serves the daily transfer of money between the participating banks. With the collapse of interbank transactions in Europe as a result of the financial crisis, the European System of Central Banks (ESCB) was forced to take action in order to assure the necessary liquidity for capital outflows and the purchases of goods between European countries. The requirements for collateral for granting bank loans have been successively reduced. This has led to a situation where the EURO system has replaced the interbank market to a large extent. The majority of cross-border financing requirements of the banks are no longer satisfied by loans made between the commercial banks of the participating countries themselves; the commercial banks in the importing countries refinance themselves through their national central banks and the cross-border payments are handled by the European Central Bank (ECB) and thus by the TARGET2 system. The national central bank of the exporting country then receives a claim against the ECB and the national central bank of the importing country receives a corresponding liability. The Deutsche Bundesbank (German Central Bank) in recent years has accumulated in this way TARGET2 claims totalling around EUR 700 billion. This article shows that these claims are debts of the European periphery countries vis-à-vis Germany, that the TARGET2 system contributes to a misallocation of productive resources, that it fosters the accumulation of debt by the European periphery countries, and that a lack of collateral deepens the European balance of payments crisis. It is shown that the TARGET2 balances are representing considerable risks for Germany.
Table of Contents
1. INTRODUCTION
2. MATERIAL AND METHODS
3. RESULTS AND DISCUSSION
3.1 The Collapse of Private Funding Sources
3.2 Emergency Liquidity Assistance
3.3 Dramatic Increase in the TARGET Balances
3.4 Public Discussion on the TARGET Balances
3.5 Model for Testing the Hypotheses
3.5.1 How the TARGET2 Balances Arise
3.6 Are TARGET2 Balances Loans From the Core Countries to the Peripheral Countries?
3.7 Does the Automated Financing Through TARGET2 Lead the GIPS Countries to Live Beyond Their Means?
3.8 Do the Large Claims of the Bundesbank Against the EURO System Hold Considerable Risks for Germany?
4. CONCLUSION
Research Objectives and Themes
This article analyzes the development, causes, and economic consequences of TARGET2 balances from a German perspective, specifically investigating whether these balances pose significant financial risks for Germany in the context of the European sovereign debt crisis.
- Mechanisms of TARGET2 and the role of the European Central Bank
- Impact of the interbank market collapse on liquidity provision
- Evaluation of the credit hypothesis regarding TARGET2 balances
- Macroeconomic risks for Germany and the stability of the Eurosystem
Excerpt from the Book
How the TARGET2 Balances Arise
A beverage producer in Greece decides to buy a filling machine with a value of EUR 100,000 from a German supplier.
1. First, the beverage producer takes a loan from its commercial bank in Greece (house bank). He deposits collateral, which must meet the standards of his bank, because they bear the risk (e.g. a mortgage or a government bond). The credit is posted in its entirety to the beverage producer´s account at the commercial bank.
2. The supplier will now export the ordered filling machine from Germany to Greece.
3. After the arrival of the machine, the beverage producer instructs his commercial bank to pay EUR 100,000 to Germany to the commercial bank account of the supplier. The transfer results in a debiting of the account of the beverage producer with EUR 100,000.
Chapter Summaries
1. INTRODUCTION: Provides an overview of the TARGET system established in 1999 and the subsequent transition to the TARGET2 system in 2007.
2. MATERIAL AND METHODS: Outlines the research approach, which relies on literature research and case study analysis.
3. RESULTS AND DISCUSSION: Details the transition from private funding to Eurosystem-based refinancing, the surge in TARGET2 balances, and evaluates specific hypotheses regarding the risks posed to Germany.
4. CONCLUSION: Summarizes the findings, suggesting that TARGET2 balances serve as an indicator of the European balance of payments crisis and that significant, albeit complex, risks for Germany persist.
Keywords
Deutsche Bundesbank, Emergency Liquidity Assistance, European Central Bank, ESCB, GIPS Countries, GNLF Countries, Interbank Market, Real Time Gross Settlement, TARGET2 Balances, Eurosystem, Monetary Policy, Sovereign Debt Crisis, Financial Stability, Capital Flight, Liquidity Provision
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines the TARGET2 payment system, specifically focusing on the accumulation of large balances by the Deutsche Bundesbank and the associated economic risks for Germany amidst the European debt crisis.
What are the primary thematic areas addressed?
Key themes include the failure of private interbank funding, the role of the Eurosystem as a lender of last resort, the mechanics of how TARGET2 balances are created, and the potential liability of German taxpayers in the event of an Eurozone exit.
What is the central research question?
The study seeks to clarify whether TARGET2 balances represent actual loans to peripheral countries and to what extent these balances constitute a significant financial risk for Germany.
Which scientific methods are employed?
The author utilizes literature research and detailed case study analysis to model the transaction flows and test specific hypotheses regarding current account deficits and capital flight.
What content is covered in the main section?
The main section investigates the collapse of the private interbank market, the function of Emergency Liquidity Assistance (ELA), and the critical debate surrounding the nature of TARGET2 balances as quasi-public financing.
Which keywords characterize this work?
Central terms include TARGET2 Balances, Deutsche Bundesbank, Eurosystem, GIPS countries, liquidity provision, financial risk, and European debt crisis.
How does the author explain the creation of TARGET2 balances?
The author uses a fictitious example of a cross-border purchase of a machine to illustrate how a private transaction turns into a central bank claim/liability via the TARGET2 system when private funding channels are absent.
What conclusion does the author reach regarding risks to Germany?
The author concludes that TARGET2 balances serve as a major indicator of the balance of payments crisis and that Germany faces substantial risks if peripheral countries withdraw from the Eurozone or if the system suffers a complete breakdown.
- Quote paper
- Markus Kutscheid (Author), 2012, TARGET2 Balances from a German Perspective, Munich, GRIN Verlag, https://www.grin.com/document/198752
