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Europe, Italy

TARGET2 update: Greek and peripheral Europe imbalances

Stefano Fugazzi (ABC Economics) – Readers of my last book “ABC Economipedia” (click here for the eBook version, now on sale for £5.00), and more generally everyone who has read my analyses around the eurozone crisis since 2011, should be familiar with the concept of TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System), an interbank payment system for the real-time processing of cross-border transfers throughout the European Union. TARGET2 replaced TARGET1 in November 2007).

Those who are not-so-familiar with the mechanism should take a look at the exhibit below:


In this example the Greek central bank has to reduce “base money” while Bundesbank increases “base money” by transferring cash from the Greek banking system to the German banking system (to pay for the truck). Simultaneously Bundesbank now has a future claim on the ECB while the ECB has a claim on the Greek central bank (effectively to reverse the “cash transfer” in the future). With significant periphery trade deficits, these claims have now grown quite large.

The following two exhibits show the latest TARGET2 liabilities for Greece and a breakdown of the individual TARGET2 positions within the eurozone. The reader should note that on aggregate all balances net down to zero as, for instance, a large TARGET2 liability in the Greek’s central bank balance sheet is “counter-balanced” by a large exposure (asset) in Bundesbank’s accounts.





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