TARGET2 as a scapegoat for German errors | vox - 0 views
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This coincided with the bubble years in peripheral Eurozone countries (2003-07). The effect of this is that Germany accumulated large net claims on Eurozone countries, which at the end of 2011 amounted to €634 billion.
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These current account surpluses did not lead to TARGET2 claims during the bubble years because the counterpart of these surpluses were increasing claims held by (mainly) German banks against the other Eurozone countries.
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the German banking system was lending the money to other Eurozone countries to allow them to buy surplus German products – a highly risky affair.
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It should have been obvious that the debtor countries could get into payment difficulties as they were piling up debt made possible by the loans of German banks.
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If there is a breakup of the Eurozone, Germany will face the risk that some debtor countries default on their debt. But again this risk is not affected by the size of the TARGET2 claims of Germany.
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The risk that Germany faces as a result of its net exposure to other Eurozone countries is therefore entirely of the country’s own making.
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Since 2009, when the TARGET2 balances started to take off, current account deficits of the peripheral countries as a whole declined from 9.1% of their GDP to 4.5%. These declines were mainly due to deep recessions in these countries.
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Sinn (2012) argues that these deficits would have had to decline even faster had there been no financing through the TARGET2 mechanism. This is certainly true. But this is the same as saying that these countries should have pushed their economies into even deeper recessions.
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The main reason why German TARGET2 claims have increased so much since 2010 is capital flows. The flows have taken two forms.
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The first one came about when German banks unloaded their loans made to peripheral countries into the balance sheet of the Bundesbank.
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The second one was the result of non-residents shifting their deposits from their local banks into the German banking system out of fear of a breakup of the Eurozone.
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This led German banks to stop their credit lines to southern banks (and other northern EZ banks followed)
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Thus in the scenario of a breakup, with or without TARGET2 claims, the risk of large losses for the German taxpayer is very similar.
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the Bundesbank can eliminate the risk of such last minute accumulations of TARGET2 balances by converting euros into new German marks only for German residents.