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German Concern over ECB Funding Grows

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Germany is getting worried–more worried than usual–about the level of debt in the eurozone. The European Central Bank’s Target2 system indicates that money owed to the Bundesbank now totals 489 billion euros ($656 billion). That is an increase of nearly 65% from 2011, and amounts to approximately 20% of Germany’s economic output.

Bloomberg reported Tuesday that Germany is growing more concerned about the imbalance in the system, also known as the Trans-European Automated Real-Time Gross Settlement System. Target2 is the means by which countries settle business transactions in the eurozone.

If, for instance, a Greek importing company wants to place an order with a German company, the ECB’s Target2 system would handle the logistics so that the German company would end up with a credit at the Bundesbank, while the Greek company would owe the Greek central bank on the transaction.

Andrew Bosomworth, a managing director at Pacific Investment Management Co. in Munich, was quoted saying, “The Bundesbank effectively ends up with loans to the other national central banks that are reflected in the Target2 claims on the eurosystem. The eurozone is doing fiscal policy-like stuff through monetary policy, but it’s not going through the same democratic process. It’s not a good thing from a voter’s perspective when you push it to the limit.”

If commercial banks do not want to deal with one another, balances between them fall–well, out of balance. Currently other countries within the system owe the Dutch central bank a balance of 153 billion euros, and Luxembourg 110 billion euros. Germany, however, is owed the most, and it is not happy about it.

John Whittaker, an economist at Lancaster University Management School, who drew attention to the growing imbalances in papers published last year, was quoted saying, “The Germans are very much justified in their concern. The Target2 liabilities are just as risky and just as real as holding the government bonds of Greece and other peripherals.”


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