Colleagues,
I have recently written a note with Ebrahim Rahbari and Juergen Michels
titled
"TARGETing the wrong villain: Target2 and intra-Eurosystem imbalances in
credit flows"
. We review recent articles by Martin Wolf and Hans-Werner Sinn on
the role and interpretation of intra-Eurosystem (Target2) credit imbalances.
We dispute their conclusions on both conceptual and empirical grounds.
. Target2 is the payment and settlement system in the euro area for
euro transactions between national central banks (and some private
participants) with central bank money.
. Increases in Target2 net liabilities of, say, the Central Bank of
Ireland (CBI) should not be automatically interpreted as financing of Irish
current account deficits.
. The ECB, like any other major central bank, targets an interest
rate, not money or credit stocks - those are endogenously/demand-determined
by commercial banks.
. Increases in CBI Target2 net liabilities thus do not cause
reductions in central bank credit for German, or indeed any other euro area
country's, banks.
. The stock of net Target2 claims of the Bundesbank does not reflect
its exposure to risk and financial losses of other euro area central banks -
the right measure would be the total exposure of the Eurosystem multiplied
by the adjusted ECB capital share of the Bundesbank.
. The Interdistrict Settlement Account procedures of the Federal
Reserve System do not prevent sustained interdistrict credit imbalances.
. Intra-Eurosystem credit and Target2 imbalances primarily reflect
the difficulty of obtaining private market funding for euro area periphery
banks. While a serious issue, we argue this is conceptually distinct from
the case made by Wolf and Sinn.
The whole note can be downloaded in pdf format from
http://www.nber.org/~wbuiter/originalsinn.pdf
Regards,
Willem Buiter
Chief Economist, Citigroup.
Received on Fri Jun 10 2011 - 11:31:00 EDT
