GoldMoney / April 14, 2012
It seems that every time you turn over a stone on the rocky shore that is the financial condition of the eurozone you find yet another nasty creature underneath. This time it is to be found across the accounts of the individual national central banks.
The problem has arisen in the cross-border settlement system known as TARGET (an acronym for the Trans-European Automated Real-time Gross settlement Express Transfer System). Money flowing, say, from Greece to Germany is replaced by the Bank of Greece electronically issuing euros, and the inflow into Germany is neutralised by the Bundesbank withdrawing euros from circulation. Both trade imbalances and capital flight are accommodated by these means, and there is no net currency issuance to cover the imbalances. The new currency in Greece would be accounted for by the Bank of Greece showing a liability in its books in favour of the Bundesbank, and the Bundesbank would record an asset in the form of a corresponding loan to the Bank of Greece.
In the past this has not been a problem because the capital flows in the form of commercial bank credit were readily available to fund, for example, purchases of Mercedes buses by a Greek tour operator. However, since the financial crisis capital flows to the peripheral eurozone members have been disrupted, so that trade imbalances within the Eurozone have not been financed by capital flows. The result is that liabilities have been piling up at the central banks in Germany, the Netherlands, Luxembourg and Finland. The chart below, taken from a recent Bundesbank press release, illustrates the situation.