TARGET2 Euro Clearing System an Indicator of Dysfunctional Banking System in Euro Zone

Another excellent indicator of the extent of crisis and mistrust among the European banks is the Net Balances in the TARGET2 Euro Clearing System. It is also a good indicator of the kind of losses Germany would be exposed to if there is a break-up in the Euro zone in the medium to long-term.

The first chart gives the net balances in TARGET2 Euro Clearing System in Billions of Euros

Net Balances in the TARGET2  Euro Clearing System

The second chart gives the net balance in the TARGET2 Euro Clearing System for PIIGS countries compared with Germany, Luxembourg, Netherlands and Finland

Net Balance With Eurosystem (TARGET2) for PIIGS and Germany

TARGET2 is a settlement system that clears payments between the Central Banks in the Euro Zone. Clearly, from the charts above, Germany is the largest creditor in TARGET2. Germany's credit has ballooned from EUR323 billion in May 2011 to EUR698 billion in May 2012. In the worst case scenario, if there were a break-up in the Euro Zone, Germany would be exposed to huge losses. 

As mentioned above, the TARGET2 balances also show that the European banking system is dysfunctional and there is a big lack of trust among banks. Therefore, it is not surprising to see the Central Banks providing the necessary credit. 

In all this, Germany has to suffer the most. Providing credit and bailout to banks and countries, which have a long-term structural problems will only lead to losses for a country which is in an excellent fundamental position (relatively). 

Chesscat  – (June 19, 2012 at 8:03 PM)  

The Target2 imbalances would indicate that Germany is already on the hook for a lot of peripheral debt. Some might argue that given this existing obligation, Germany should go ahead and consent to EuroBonds. Here's an interesting article from Reuters - see the punchline at the end.

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