Target2 imbalances in the eurozone continue to mount. The ECB itself now has the third largest negative balance following Italy and Spain.
Target2 is a measure of capital flight. Those needing a further explanation of Target2 may wish to consider Reader From Europe Asks “Can You Please Explain Target2?”
Data for the following charts and tables is from ECB Target Balances. Neither the ECB nor Eurozone officials likes to discuss these numbers for obvious reasons.
Although it’s June, the latest data is for April.
Here is the ECB’s chart with my annotations in blue.
Tracking 20 lines by colors is more than a bit problematic. The following chart breaks out the key creditors and debtors.
Largest Creditors and Debtors
Growing Negative Imbalance at the ECB
How Does the ECB Get a Negative Balance?
Pater Tenebrarum at the Acting Man blog explains via email:
ECB’s “QE” program is for the most part in practice actually executed by the national central banks (NCBs). Thus, the CB of Spain will buy Spanish bonds that are eligible for the program, the Bundesbank will buy German bonds, etc. – the ECB together with the EU’s National CBs forms the “ESCB” (the “European System of Central Banks”), while the ECB and the NCBs of members of the euro zone form the so-called “Euro System”.
The QE program has been decided on by the ECB, but is run by the Eurosystem. While most of the asset purchases are executed by the NCBs, not all of them are. The ECB itself also buys various assets (everything from sovereign bonds to covered bonds, ABS, corporate bonds and agency bonds). The ECB’s purchases are distributed across the Eurozone. So what happens when the ECB e.g. purchases €100 m. in agency bonds in Spain?
Accounting-wise, the ECB is treated as if it were the CB of a different, independent country. Remember, the money it uses to effect the purchase is created by the push of a button, literally from thin air. Other than that though, it cannot be differentiated from money someone had to work for and has saved. If the ECB now makes the above example purchase, it is no different from Spain’s point of view than a bond purchase by some other, normal foreign investor.
Hence, it is akin to a capital import, and Spain’s TARGET-2 balance will improve by the €100 m. But when the TARGET balance of one Eurosystem NCB improves, there has to be a negative, offsetting TARGET balance created at some other NCB. Only, in this case, it is not another NCB, but the ECB itself that gets to record the offsetting negative balance.
So the ECB’s balance sheet will now show the Agency bond as an additional asset and the negative TARGET balance as an offsetting liability. At the Bank of Spain, the mix of liabilities will change, since its overall TARGET balance remains negative. It will record a new reserve deposit by the commercial bank which administers the account of the seller of the bond as a new liability, while the offsetting gain in its TARGET balance will lowered its TARGET liabilities by the exact same amount. So instead of owing the money to another NCB, the Bank of Spain now owes it to a commercial bank in Spain.
Improvements in Spain and Italy (except there haven’t been any) are masked by the growing imbalance at the ECB itself.
Mike “Mish” Shedlock
Thanks to PT for the clear explanation. I will add a chart for you, used by
to justify that there is no funding stress. Clearly if refinancing is stable since mid 2014, then there are other levers at work that allow the increase in German target2 claims, the ECB being one of them.
Comment with link held up again.
Reading up a little, and opinion seems to be that low rates have stimulated the offloading of peripheral debt to local NCBs with net transfers of capital to Germany. In otherwords new liquidity sponsored by low rates still does not find the periphery worth investing in. Nothing too new there except that it says confidence remains low. That the ECB is soaking up paper, monetizing it… I suppose that we are looking at a method to bypass ECB restrictions on eligibility regards ELA, LTRO having been installed on a mutualized basis of equal allocation, therefore appearing as if the ultimate liability is not national but the new ECB target2 account, which in effect becomes akin to a mutual national account. That is to say we no longer look and think Greece owes Germany, instead it appears as the ECB owes Germany. As this ECB account represents all Euro countries, in effect it places EU indiscriminately at the debt of Germany. This is a corrupt circumstance as a bank in debt, even the ECB, will be subordinate to credit holders, and hence Germany will, and is, taking priority and senior position in ECB policy directly over EU as a whole without clear individual national representation of the resulting financial balance.
Links provided…hopefully they will show eventually…
Italy remains my biggest concern. While the ongoing misery of Greece continues to play out our eyes have been diverted from economic problems that fester and brew in Italy. Many people have failed to notice the Euro-zone debt crisis has taken a heavy toll on Italy where consumption and investment are expected to remain weak. The country’s economy has shrunk by around 10% since 2007.
All in all it might be fair to say Italy is a European debt bomb waiting to explode. This is not sustainable and the country is held together only because of the direct intervention of the ECB which made over 102 billion euro of Italian bond purchases in 2011-2012 alone. This has continued since then and the sum has gotten much larger. More on Italy’s growing debt problem in the article below.