Claims against the Eurosystem continue to rise

The increase in German claims against the European Central Bank continues above the trillion mark. What is behind these huge numbers? The ECB presents several reasons for this.

A lot of money

DGermany’s target balance had risen to EUR 1.056 trillion by the end of August. The Deutsche Bundesbank announced this on Monday. The claims of the Deutsche Bundesbank from the European payment system “Target 2” against the European Central Bank (ECB) have increased by around 37 billion euros compared to July. In July, this value, the interpretation of which there is always much controversy among economists, exceeded the one trillion euro mark for the first time. The ECB and the Deutsche Bundesbank had primarily blamed the Eurosystem’s bond purchases as part of the € 1.35 trillion pandemic program PEPP for the spread of the Target balances. The Bundesbank had also considered other causes to be possible.

Among other things, the question of whether the rise in the German Target balance is to a considerable extent also a form of capital flight from southern European countries to the north is controversial. The Osnabrück economist Frank Westermann, for example, who cultivates a very broad concept of capital flight, sees such movements as the decisive reason for the increase in Target balances. “In the Corona crisis, investors want to part with risky securities in southern Europe and prefer to purchase safe assets in Germany,” Westermann told the FAZ with which they can acquire secure assets in Germany, for example. “These cross-border transactions would result in corresponding movements in the Target balances:” The German balance is increasing, the southern European balance is becoming more negative. “

In parallel with the spread of the Target balances, the total of refinancing loans from central banks in Europe has also increased, says Westermann. These are the loans that the Eurosystem grants against collateral through the individual national central banks in their countries. The sum of these loans increased significantly in the Corona crisis. So these are loans that were partly granted against risky collateral that private investors wanted to get rid of.

The statement by the ECB

The ECB recently stated on its website that the rise in Target balances should not be a cause for concern, as it was a logical consequence of current monetary policy. The central bank had explained the increase as follows: Target 2 is a system that moves money from one bank to another, both within countries and across borders. Central and commercial banks use it to process payments in euros. The net cash flow between two countries is recorded in the balance of the national central bank. In order to avoid that every single central bank of the Eurosystem builds up its own balance with each other, all bilateral balances are combined into a single balance with the ECB at the end of the day.

When banks in a country have sent more money than they received, the national central bank has a negative balance. If it has received more money than it has sent, it has a positive balance. The ECB gives three reasons for such cross-border movements of money: to pay for goods, services or financial investments; when banks borrow money; or monetary policy, when banks get loans from the central banks in return for collateral.

The ECB now describes different possibilities why the balances can diverge. In the financial crisis, the banks would no longer have dared each other. Central banks jumped in. “Between 2008 and 2012, the target balances grew because of the large amount of money that was created and crossed borders,” writes the central bank.

The reason for the recent increase since 2015 is different. Behind it were the monetary policy bond purchases. Bonds would be bought from the respective national central banks: The Spanish central bank, for example, would buy Spanish government bonds. But sellers are often international investors who hold their accounts in important financial centers, such as Frankfurt. Therefore a bond purchase ensures movements in the target system – in the example positive in Germany, negative in Spain.