The euro zone’s huge but invisible liabilities require action from regulators


What are the accepted levels of TARGET2 debt?

It has been admitted by many commentators that Germany is a depositor in TARGET2 for an amount of just over EUR 1 trillion, and that Italy and Spain are borrowers for amounts of around 500 billion euros each.

These figures are, however, determined after applying a novation and clearing process to the end-of-day balances of the 600 current accounts held between the ECB and central banks to process TARGET2 cross-border payments.

Novation and compensation take effect during the TARGET2 end-of-day cycle around 6.30pm CET and are reversed less than an hour later in the TARGET2 start-of-day cycle for the following day. Debits and credits should be passed on the 600 accounts to give operational substance to novation and netting, but what they are is not public.

The balances before novation and compensation at the end of October amounted to 3,000 billion euros. Novation and netting reduced them to € 1.2 trillion in borrowers and € 1.6 trillion in depositors, leaving the ECB with a net borrowing position of € 0.4 trillion.

These 0.4 trillion euros are a contingent liability of each member state in accordance with their central bank’s capital key in the ECB, but, being only a contingent liability, it does not appear in “debt”. gross of general government ”.

It is assumed that the EUR 1.2 trillion in net borrowing positions does not appear in the “general government gross debt” of the relevant Member State, although they are debts of their central bank to the government. BCE.

However, the additional € 1.4 trillion layer of gross debt – along with gross deposits – will not appear either. These never see the light of day in ECB reports. It is therefore not clear whether the borrower’s debt is owed to the ECB or to other central banks. In all cases, this is a central bank debt and should appear under the heading “Gross debt of general government”.

These accounting treatments distort the expression “gross debt of general government”.

What needs to be done?

It will undoubtedly be an unpleasant surprise for Germany that its huge net depositor position in TARGET2 at € 1.1 trillion could reach € 2.5 trillion on a gross basis.

Who owes what to whom in total? And throughout the day rather than just an hour at the end? These are the questions that accounts should answer, but they are not in this case.

The status quo is not sufficient for an issue of such importance: the current lack of information around TARGET2 balances is part of the threat to global financial stability presented by invisible debts weighing on EU member states. ‘EU / euro area.

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