Target2, ECB, and Euro NCBs

Commented at FT Alphaville on How Germany is paying for the Eurozone crisis anyway:

There are some good bits in the VOXeu article, although I have a few quibbles.

““that the Bundesbank will soon exhaust the stock of securities that it can sell to fund further loans to the Eurosystem.””

The Bundesbank doesn’t need to fund its loan to the ECB by selling off assets. Effectively, German banks are deserting the PIIGS banks in droves. Reserves are flowing from the accounts of PIIGS banks at their domestic PIIGS NCBs to the German reserve accounts at the Bundesbank . Thus the Bundesbank’s reserve accounts (a liability to its domestic banking system) are rising even as its credit to the ECB (an asset on its balance sheet) rises. This is more or less automatic. So in order to balance a rapidly increasing credit item to the ECB, the Bundesbank doesn’t need a declining quantity of assets to act as the balancing mechanism; increasing reserves held at the Bundesbank will do the trick. There is nothing to exhaust. They don’t have to sell their gold.


Note that I think Karl Whelan’s rejoinder “Worse than Sinn” available here is the best rejoinder to the FT Alphaville post.

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