In recent months the Target2 balances of the various countries in the euro zone have drifted further apart. Since the start of the year, Bundesbank receivables from the ECB as the central counterparty of the Target2 system have risen by around EUR 70bn to currently around EUR 976bn (as of June). Luxembourg, Finland and the Netherlands currently show positive target balances in addition to Germany, albeit to a much lesser but nevertheless significant extent. In contrast, particularly the central banks of the European periphery have accumulated substantial liabilities to the Eurosystem. Italy is currently the leader here in negative terms with a volume totalling EUR 464bn, closely followed by Spain with a negative balance amounting to EUR 393bn (as of May).
At the height of the euro debt crisis, rising Target2 balances reflected the fact that, due to a dwindling inflow and excessive outflow of private capital (capital flight), the banking sector at the European periphery had become increasingly dependent on central bank liquidity. Against this backdrop, theTarget2 balance development was a significant crisis indicator for tensions in the European banking system in the past. With regard to Spain, the developments playing a role at that time are of no significance at present. Spanish commercial banks can be seen parking considerable volumes of liquidity at the Banco de España. This contradicts the hypothesis of a broad-based capital flight. The situation in Italy is somewhat more differentiated. While Italian commercial banks are also parking substantial amounts of liquidity at their central bank (EUR 86bn), this amount was far higher at the beginning of the year (EUR 138bn). The recent political upheavals in Italy might have prompted some market players to bring some of their bank deposits to „safety“. If these funds were transferred to a German financial institution, this would have resulted in an increase in German Target2 receivables.
However, the increase in Target2 balances in recent years is likely to have been influenced to a considerably greater extent by the ECB’s bond purchasing programme. The increase in positive Target balances in Germany, Finland, Luxembourg and the Netherlands, for example, is comparatively closely associated with an increase in the ECB bond portfolio.
The following example illustrates one possibility in which the bond purchase programme causes the Target2 balances to drift apart. If, for example, the Italian central bank acquires Italian government bonds from a German commercial bank rather than from a domestic bank, this would have a direct effect on Target2 balances, as central bank liquidity is credited on a cross-border basis. The Bundesbank would record a rising Target2 receivable, while the Italian central bank would post a higher Target2 liability. Another factor that has a fundamental influence on Target2 balances is bond purchases from financial institutions domiciled outside the euro zone. In this context, the national central bank through which the international business partner is connected to the Target2 system is decisive for the development of Target2 balances. If, for example, the international financial institution maintains an account with the Bundesbank, which is often the case due to Frankfurt’s role as a financial centre, bond purchases by other central banks of the Eurosystem would lead to inflows at the Bundesbank and increase its Target2 receivables.
Ultimately, the uneven distribution of the central bank liquidity pumped into the market by the ECB is reflected in the fact that Target2 balances are drifting apart. In a monetary union, however, this fragmentation between the individual euro countries should be less pronounced. The drifting apart of the Target2 balances can be expected to decelerate looking ahead, with the ECB recently deciding to end its bond purchases at the end of the year. However, the lack of investor confidence in Italian politics remains a risk factor. Only when this is restored will there be a possibility of the Bundesbank’s Target2 balance with regard to Italy decreasing again. In broad principle, Target2 balances do not pose a problem as long as monetary union remains in place or the „deficit countries“ stay members of the Union. But even if a deficit country were to leave monetary union, this would have no real economic consequences. The central banking system would feel the consequences which would be politically and economically manageable.