domenica 5 maggio 2024

Di nuovo su TARGET2


 Pubblicato su BRAVE NEW EUROPE

The endless TARGET2 saga

Sergio Cesaratto, Eladio Febrero, George Pantelopoulos*

TARGET2 imbalances seem to be an endless source of controversy. At the beginning of the last decade, Hans Werner Sinn claimed that T2 imbalances served to fund current account deficits forgetting the responsibility of German mercantilism. Last week Eurointelligence raised the question of presumed onerous interest payments burdening the southern countries with TARGET2 liabilities to the advantage of northern countries. This post shows that this is false, as TARGET2 imbalances do not entail, de facto, intra-Eurosystem payments.


"Trans-European Automated Real-Time Gross Settlement Express Transfer System" (TARGET2) is in principle a payment system in which intra-Eurozone payments  are settled. The TARGET2 (T2) imbalances saga seemingly began in 2011 when the German economist Werner Sinn denounced the possibility of (southern) Eurozone countries financing their current account (CA) by issuing an IOU – an accounting promise of payment called TARGET2-liability – that the other members were obliged to accept. Sinn forgot that Eurozone CA imbalances in-part depended on the German mercantilist policies that it cultivated with much gusto in the euro fixed-exchange rates environment. Be this as it may, T2 imbalances exhibited two peaks, the first in 2011-12 when northern investors repatriated their financial investments from southern government and bank bonds, and the second predominantly from 2015 mainly for the modalities in which the Eurosystem national central banks (NCBs) carried out large-scale purchases of government securities under the ECB outright purchases programme (i.e. quantitative easing programme).

The question of concern is that, if a T2 indebted country leaves the Eurozone, it might repudiate this debt (which is symmetrically part of net wealth of the remaining countries with T2 claims).

The story has been narrated several times, including by Cesaratto (2021) and Febrero et al (2013). With the progressive quantitative tightening adopted by the ECB since last year, T2 imbalances are currently slowly shrinking.

Despite the amount of ink spilt over more than a decade on T2 imbalances, a still unsolved point in the literature regards whether interest payments are made or not by the NCBs on their T2 liabilities in favour of the NCBs with T2 claims. The question was not so pressing as long as the ECB’s policy rate remained at zero (or below), but has become more urgent with policy rates in positive territory. Last Friday, for instance, the usually well-informed Eurointelligence,  citing Marcello Minenna, reported that: “at 4% interest rates, the current imbalances would cost the Bank of Italy some €30bn per year, and lead to a revenue for the Bundesbank of €50bn”, concluding that, therefore, “they are financially relevant.”

Well, we can reassure our readers that nothing so dramatic is happening, at least on this front. In a study that we are conducting (that will shortly be published as a working paper), we show that de facto no payments are made on T2 liabilities. But the reason why is not so simple. It involves in fact an almost unknown redistribution mechanism that operates among the Eurosystem NCBs called “monetary income”. NCBs indeed realize interest income and expenses on their operations, many of which are related to monetary policy or to the functioning of the payment system. However, interest income and expenses related to common monetary decisions might in some cases be distributed unevenly among the NCBs, that is violating the proportions dictated by their respective capital-keys (their respective share of the ECB capital). These interest income and expenses are therefore pooled (centralised at the ECB) and reallocated according to the capital-keys.

Returning to the issue of T2 imbalances, prima facie, the Eurosystem regulations prescribe that NCBs with T2 liabilities must pay monthly interest calculated at the rate on the main refinancing operations (MRO) (a sort of ECB official rate), interest that the ECB transfers to the NCBs with T2 claims. The former NCBs make a loss while the remaining NCBs make a profit. However, the same regulations prescribe that, at the end of the year, the former NCBs can transfer their losses to monetary income – de facto cancelling the losses from their Profit & Losses Account.  Symmetrically, the remaining NCBs must pool their profits through the same vehicle – de facto cancelling the profits from their Profit & Losses Accounts. So, while any trace of profit and losses is deleted from the local P&L accounts, the Eurosystem monetary income has nothing to redistribute in terms of T2 imbalances, given that the losses brought in by some NCBs are perfectly equal to the profits contributed by the remaining NCBs.

Indeed, during our research, we have consulted the responsible office of a major NCB, that absolutely confirmed this story. This was already provided in fact by the ECB economist Philippine Cour-Thimannm in her authoritative report on T2 at the time the T2 controversy blew up:

“Target balances are de facto not remunerated within a cohesive monetary union. (…) First, it is important to recall that the size or distribution of Target balances have no impact on the monetary income of the individual NCBs within the Monetary Union. Target balances in first instance bear monthly payments at the prevailing marginal interest rate in the main refinancing operations (in full allotment equal to the main refinancing rate). These interest payments flow from NCBs with Target liabilities via the ECB to NCBs with Target claims. However, at year-end, when the NCBs pool their monetary income net of expenses in the context of the income-sharing scheme, these interest payments are taken into account and thus offset. Still, in the context of perceived risk on the cohesion of the Monetary Union, the fact that the Target balances accrue the monthly interest payments might be seen as remunerating such risk." (Cour-Thimann 2013, p. 29)

Interestingly, in the last passage Cour-Thimann also provides the rationale for the eventually ineffective monthly payments: in the case where a country with T2 liabilities leaves the union during the year – thereby reneging its T2 debt – it would have at least paid an interest on its T2 liabilities during the year, which is ‘returned’ if it doesn’t eventually leave. Symmetrically, the NCB with T2 claims receives a remuneration for the risk it has incurred over the year (of seeing its T2 claims renegaded), and ‘returns it’ when, at the end of the year, the risk has not materialised.

Monetary income is an important issue that few economists understand (this reminds of the situation when Sinn raised the T2 imbalance controversy). We are also undertaking research with regard to its relevance for another much-discussed issue: the fiscal costs of the ample reserve regime that resulted from the outright purchases programmes adopted by the ECB (along the other central banks) in the last decade. For reasons we must defer to another post, this regime is here to stay. Exorbitant fiscal costs currently result from the high interest rates NCBs pay on bank deposits. While this has transpired in many jurisdictions around the world, the complication in the Eurosystem is that these costs are then pooled and reallocated via monetary income.  This opens a new can of worms. But this is enough to raise the curiosity of our readers.


* Respectively at University of Siena (Italy), University of Castilla-La Mancha (Spain), University of Newcastle (Australia).

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