Monday, February 27, 2012

Are ECB TARGET2 risks equivalent to a "bank run"?

The following is from an article in Der Spiegel this morning, on the inherent risks of what is essentially the ECB's own QE programme, due for a massive increase tomorrow, in one sub-section titled as being "Like Free Heroin for Junkies" all linked from here, and from whence I quote this:

When, say, a Greek auto dealer pays for a German car, the money flows from his home country to Germany. When a Greek bank receives a loan from a foreign investor, the money flows back.

However, since banks in ailing countries like Greece are no longer receiving money from private investors and the ECB is helping out instead, the TARGET2 deficit of these countries has soared in an alarming manner. Italy, for instance, now owes the euro system €180 billion -- compared to just one year ago, when it had a deficit of only €20 billion. "This is a bank run," says Ansgar Belke from the German Institute for Economic Research (DIW). "Investors have basically withdrawn their money from Italian financial institutions from one day to the next."

Germany, on the other hand, is currently owed around €500 billion within the TARGET2 system. In an interview with the center-right
Frankfurter Allgemeine Zeitung newspaper last week, ECB head Draghi played down the significance of those imbalances. "There are no risks in a cohesive monetary union," he said.

But what happens if one or more countries actually default on their loans and leave the euro zone? Ifo head Sinn has no doubt: "Then the deficits would have to be balanced out." Germany would have to shoulder enormous costs as a result.
Is Mario Draghi now the most dangerous man in the world, and indeed is he still within anybody's control?



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