Euro Area

[gaelic cowboy]

You are mistaken when you say that the Target2 repayments have been made. It was being repayed when all was hunky dory but that is precisely what is indicated by the phrase 'Target2 exposure'; it has not been payed. It is an 'asset' should it be repayed but for any chance of that the system has be kept going, which of course requires ever more money. Seriously how can Greece make Target2 payments to the ECB when it relies on ECB/IMF drip feed anyway? I know that the 'troika' loans to Greece enjoy 'seniority' to other bond holders but wouldn't it be a little self defeating to have German exports to Greece (which is actualy relatively small) propped up 'troika' loans? If it was all tickety-boo and the 700bn euros had "already" been repayed then I agree it wouldn't be a problem. It hasn't though and thus it's an "exposure".

You wont send on your goods to a customer unless you recieve payment for them so therefore the high current account surplus is what accounts for the target 2 increases. Target 2 is not a borrowing facility it's a payment facility for money that already exists the situation with Greece barely comes into it.

A Greek farmer want a new tractor so he gets a loan from his bank and buys a nice new Deutz-Fahr, the Bank of Greece is informed by the greek farmers bank to pay the german bank of the Same Deutz Fahr corporation for a tractor. As a result the Bank of Greece account is debited and the Bundesbank is credited now the Bundesbank will finally credit the local bank in Germany of Same Deutz Fahr who made the tractor. The only time collateral comes into the equation is with regard to the loan made by the Greek bank to the Greek farmer as whatever collateral used is liable for the loan on the Greek side. However the Germans have already been paid for the tractor so they dont care if the loan goes bust.

Now of course this local Greek bank might have been given capital by the EFSF to ensure a banking system in Greece so potentially this tractor was bought with money from the EFSF. However potentially Germany only contributed a share of say 20% of that loan but Germany gets 100% of the payment for the tractor. The kicker is that germany can now sit back and wait for it's 20% plus interest on the EFSF loan while essentially having staked nothing because it probably sold a bond at practically negative rates for it's EFSF contribution. Essentially Germany has already been paid for it's loan through the payments injected into it's domestic economy and bond market.

Now if Greece somehow could pull the plug on Euro membership and it's not clear how this could occur this could mean the colateral put up by the Greek farmer for his tractor is now worth less that the value of the loan. As a result the ECB may require all member states to pay for the shortfall as per there share of the overall ECB (if there stopped from printing money to pay the loan)

You only have to pay for the amount of the ECB that you own so German would end with a surplus after it pays out and Greece could potentially wipe 95% of it's target 2 out in one go. This means any countries with small imbalances gain little to nothing or potentially could even lose out if there ECB share is larger than the target 2 amounts they have.

If Greece leaves and somehow the ECB is blocked from printing the Euro it needs to cover any payments then massively imbalanced target 2 is a good thing.


Now I know your thinking surely the money cannot be just appear magically even if it can be printed by the ECB just remeber the plus side of the equation is naturally tracked by a nice big minus due to the deflation in the Greek economy. This balances the equation and essentially it can go on for as long as people continue to pay Germany to lose a small bit of there of there money for fear of losing it all.

Eventually people will tire of poor returns on German bonds and thats where the real trouble starts as it's now much harder to prop up intra-european trade with Germany.

In theory if Greece (for example) left the euro Germany would be able reclaim it's Target2 money from the ECB. "Consider an example for Germany and Greece. Germany provided about 27 percent of the capital of the ECB provided by countries belonging to the euro area (Bank of Spain 2012). Greece's TARGET2 balances are on the order of 100 billion euro. If something happened and those balances became worth half, losses would be 50 billion euro and Germany's exposure 27 percent of that, or on the order of 13 billion euro, a far cry from what might be suggested by its TARGET2 balance of approximately 500 billion euro. Furthermore, Germany's TARGET2 balance itself could be zero and the loss would be the same in this example. It is the net exposure of the ECB to countries that determines any risk associated with TARGET2." (Gerald Dwyer)

The exposure refers to a current account surplus ie Germany imports less goods and capital into it's economy than it sends out. This is because Germany is are essentially paid for these things by everyone else, now it's also important to remember that that your target 2 can be out of balance within Europe but overall your economy could be running a current account surplus.

Here we could say Ireland imports more from Europe than it exports however this is paid for many multiples of times by exports to non-eurozone countries. Essentially Ireland's only problem would then be a government deficit brought on by a reduction in GDP due to a banking sector crash.

So if Ireland left the Euro it's not neccessarily so that people would not get there target 2 money back although they might not get there EFSF money back.

In a way you are right; the ECB suffers, not Germany but as most of the loans handed out by the ECB and therefore debts owed to the ECB are German money... See my point?

Because the ECB can print Euro it doesnt need any German money so the ECB is not in debt to anyone, however troika loans require actual money from a contributing country to fund an EFSF loan and that is a debt. Money owed to the ECB is separate to the EFSF but your right money owed to the ECB would be a debt however it cannot go broke as it can print Euro. This printing of money has no bearing on inflation because Europes economy is actually in a deflationary spiral. Essentially the only thing to worry about in this senario would be the Euro's strength vs currency X with regard to sourcing imports for the larger European economy.

Recently actual auctions of both Spanish and Italian bonds have been slightly under the market trading price. I believe the last 10 Italian auction was arounf 5.4% but don't recall offhand whereas it's quoted nearer 6%. So although Spanish 2 year paper is trading for 6.7% you might expect it sell for slightly less in reality (the Spanish banks buy it). However is Spain borrows say £100 for 2 years at 6% it HAS to make more 6% profit in those 2 years to be able to repay the £100 and still make a profit. If I borrow £100 at 6% and make 20% profit it's no problem - I repay the £106 and keep £14 profit and tyvm can I do it again? Spanish 10 year bonds are above 7.5% now so that is why 2 year paper is trading nearer 6.7%. The confidence is gone and Spain certainly will need either a 'bailout' (which is more delaying tactics) or a direct ECB intervention.

But if Spain grows at say 3.5% over 2 yr it could outstrip the 7% required to pay it back by a couple of percent, remember it's 3.5% on top of the figure for this yr and then 3.5% on top of next yrs now bigger number. So if the amount borrowed was as a percent of GDP less than the growth rate over a two yr period then the figure could I believe add up overall.

Of course I dont believe that Spain can sustain a prolonged 7% anymore than Greece could so in the words of South Park

Personaly I would put the lot on trial for fraud and have rid of the euro and would be dictators in Brussels with it. Long live freedom (except for the Romans who must die!).

They will stand on top of a nuked Europe before they admit they were wrong..

[SoFarSoGood]

You only have to pay for the amount of the ECB that you own

Correct.

Now of course this local Greek bank might have been given capital by the EFSF

The Ponzi scheme they are running yes...

Now if Greece somehow could pull the plug on Euro membership and it's not clear how this could occur this could mean the colateral put up by the Greek farmer for his tractor is now worth less that the value of the loan. As a result the ECB may require all member states to pay for the shortfall as per there share of the overall ECB (if there stopped from printing money to pay the loan)

Ahahh we agree? (I am well aware that there is no 'legal' exit from the straightjacket).

You only have to pay for the amount of the ECB that you own so German would end with a surplus

Nope because, as you explain: "the colateral put up by the Greek farmer for his tractor is now worth less that the value of the loan". The others then stump up to cover the loss as as % of funds in the ECB (in the ideal world). Of course realistically asking Spain and Italy to pay more to cover someone elses 'tractors' will only cause a worse problem for them.

Because the ECB can print Euro

It can't 'print the money' by it's rules, nor can it lend directly to Governments. That was what the LTRO was about: Trying to fund the banks so that they could purchase the sovereign debt. It worked (for a while).

Look my friend as you most correctly explain the value of the tractor 'loan' diminishes should Greece devalue and return to the Drachma; indeed all Greek Target2 debt devalues. The ECB then "may require all member states to pay for the shortfall as per there share of the overall ECB". You want to ask Spain? Might not be wise right now...

So yes the ECB loses but so do the contributors to the ECB proportionaly (as you say). Ergo who loses most? Germany.

[phonicsmonkey]

Thought you chaps might enjoy this

[gaelic cowboy]

Nope because, as you explain: "the colateral put up by the Greek farmer for his tractor is now worth less that the value of the loan". The others then stump up to cover the loss as as % of funds in the ECB (in the ideal world). Of course realistically asking Spain and Italy to pay more to cover someone elses 'tractors' will only cause a worse problem for them.

The loss is born by the Bank of Greece and the local bank as thats where the loan is, lets remeber this fictional tractor has already been bought and paid for so the Germans are actually in the clear. It's the ECB and the Bank of Greece that have to worry about the credit worthiness of the loan basically I have yet to see someone who sold a house ending up with less because the guy they sold it to is in negative equity.

The only time where everyone has to stump up is if someone leaves the Euro.

It can't 'print the money' by it's rules, nor can it lend directly to Governments. That was what the LTRO was about: Trying to fund the banks so that they could purchase the sovereign debt. It worked (for a while).

This wouldnt be lending to governments it would be lending effectively to national central banks which essentially are the ECB through the various board members. So unless said printing is blocked by a vote at ECB board level I dont see how the ECB could go broke.

Look my friend as you most correctly explain the value of the tractor 'loan' diminishes should Greece devalue and return to the Drachma; indeed all Greek Target2 debt devalues. The ECB then "may require all member states to pay for the shortfall as per there share of the overall ECB". You want to ask Spain? Might not be wise right now...

Indeed which is why nobody will either be forced or choose to leave in fact.

So yes the ECB loses but so do the contributors to the ECB proportionaly (as you say). Ergo who loses most? Germany.

How can Germany lose though your original assertion was that Germany is OWED money when in fact they have really been paid. The only thing they have to worry about at all is that no one leaves and if they do there target 2 is larger than there share. Now this essentially means Germany must have a contiually weak Euro to ensure continued trade with EZ economies, naturally this kills the other economies through deflation requiring bailouts.

This essentially is a ponzi that eventually has to end but it's not clear that German politicians have woken up to that fact or that they have adequetaly explained it to there voters. Essentially all those pension funds and financial products that chased returns all over the EZ will eventually have to face the loss.

Otherwise they will sink there own currency

[gaelic cowboy]

Former Anglo chief Seán FitzPatrick charged with 16 offences as part of fraud investigation

About time this is the that effectively casued Ireland to need a bailout.





Relentless market pressure pushes Spain closer to bailout

And in other news that pesky market just wont leave Spain of the Euro alone oh dear all I can think to say in reply is Timber



looks like another full bog standard sovereign bailout

[SoFarSoGood]

How can Germany lose though your original assertion was that Germany is OWED money when in fact they have really been paid. The only thing they have to worry about at all is that no one leaves and if they do there target 2 is larger than there share. Now this essentially means Germany must have a contiually weak Euro to ensure continued trade with EZ economies, naturally this kills the other economies through deflation requiring bailouts.

As you have so eloquently pointed out if a country leaves the euro "the ECB may require all member states to pay for the shortfall as per there share of the overall ECB". Well the Spanish and Italians can't pay and France is not too healthy so who makes good the shortfall?

As for the printing money option the ECB tried that with the LTRO 1 and 2 cash injections into banks. The banks then bought their Governments debts and now face massive losses. Germany, for historical reasons (the hyper inflation of the 1920s) will not alow the ECB to print endless money. Mario Draghi says it is not the job of his institution to sort out the finances of EMU states. Its task is to ensure "price stability" ie. inflation.

It now transpires that the Spanish bank bailout is to be guaranteed by the sovereign so in effect it was a 'full fat' bailout just that the bailout money doesn't take precedence over other investors (as it did with Greece). Spanish papers say Spain may leave the euro but no doubt this is a threat for softer terms.

[gaelic cowboy]

As you have so eloquently pointed out if a country leaves the euro "the ECB may require all member states to pay for the shortfall as per there share of the overall ECB". Well the Spanish and Italians can't pay and France is not too healthy so who makes good the shortfall?.

Thats why no one will be asked to leave at least not big countries anyway, although it has still not been shown how someone can leave yet by countries who talk about forcing such things.

Thats why Germany is growing it's Target 2 credit by engaging in a massive trading surplus with EZ members, this will give it the credit at the ECB to pay for it's 18% share of the ECB.

Of course The ECB can print as many Euro as it likes and frankly it doesnt have to take a blind bit of notice of the Bundesbank cos were talking about a winding up of the Euro here.

As for the printing money option the ECB tried that with the LTRO 1 and 2 cash injections into banks. The banks then bought their Governments debts and now face massive losses. Germany, for historical reasons (the hyper inflation of the 1920s) will not alow the ECB to print endless money. Mario Draghi says it is not the job of his institution to sort out the finances of EMU states. Its task is to ensure "price stability" ie. inflation.

At the minute were experiencing massive deflation which is just as deadly and Germany is one member of a larger board, they cannot stop every decision just like they couldnt stop LTRO.

It now transpires that the Spanish bank bailout is to be guaranteed by the sovereign so in effect it was a 'full fat' bailout just that the bailout money doesn't take precedence over other investors (as it did with Greece). Spanish papers say Spain may leave the euro but no doubt this is a threat for softer terms.

Indeed just as I said could potentially happen about 50-60 pages back when I created this thread originally.

At the time I warned that if sovereigns were not separated from things like bank debt or the said debt was not inflated away then we were only going one way.

[SoFarSoGood]

Thats why no one will be asked to leave at least not big countries anyway, although it has still not been shown how someone can leave yet by countries who talk about forcing such things.

Which is what I said in the first place.

Seems Mr Draghi disagrees with you about printing money and without being rude I think he has somewhat more say than either of us (which of course may not be a good thing).

It also seems that Germany, now facing a credit downgrade, may force Greece out. As it is they have said that no further installment of the loans will be payed to Greece until September when Greece has a bond renewal due in August.