Target2 balances are drifting apart once more due to the ECB’s bond purchase programme

In recent months, the Target2 balances of the different Eurozone countries have been drifting apart continuously. The Target2 amounts due to Germany, Luxembourg, Finland and the Netherlands now total around EUR 950bn. In contrast, the central banks of the European periphery, in particular, have accumulated substantial liabilities to the Eurosystem. However, this is by no means a new phenomenon. A comparable trend was apparent in the period from July 2011 to August 2012 when capital fled the EMU periphery. The factor driving this development has, however, changed over time. The assumption is that the present rise in Target2 balances is closely associated with the ECB’s bond purchase programme, which has been in place since March last year. Accordingly, the rise in the positive Target2 balances in Germany, Finland, Luxembourg and the Netherlands is comparatively closely linked to the rise in the ECB’s bond portfolio.

Both indirect and direct effects on the trend in Target2 balances are theoretically conceivable in connection with the ECB’s bond purchases. Purchases of bonds by a national central bank from domestic banks have no direct impact on Target2 balances. Should, however, the central bank liquidity pumped into the market make its way outside the country, this would be reflected in an increase in Target2 liabilities. Purchases of bonds by national central banks from foreign banks have a more direct impact on Target2 balances. Here, central bank liquidity is credited across borders.

Based on purchases of bonds by the Italian and Spanish central banks from domestic and foreign investors, we are able to trace the increase in Target2 liabilities in the period from March 2015 to June this year. The previous factors behind the massive capital flight from local banking systems in the European periphery therefore play less of a role here. It is striking for example, with a view to the trend in credit balances of Italian commercial banks with the Banca d’Italia that these remain at a comparatively low level during the extensive bond purchases by the Italian central bank. The assumption can therefore be indirectly confirmed that the ECB’s bond purchases are currently shaping the trend in Target2 balances and not tension in the banking system. However, it is also clear that foreign investors are prepared to divest their periphery risks and no longer incur any new risks, since there is no reduction in the Target2 amounts owed.

Finally, the different allocation of the central bank liquidity pumped into the market by the ECB is reflected in the fact that Target2 balances are drifting apart. This fragmentation between the individual euro countries should, however, be less marked in a currency union. The different perception of the risk inherent in the various euro countries among investors also shows that the doubts about the robustness of the single economic area, which escalated during the crisis, are far from being laid to rest.

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