Target2 Redux: The Simple Accountancy and Slightly More Complex Economics of Bundesbank Loss Exposure Through the Eurosystem

76 Pages Posted: 1 Feb 2013

See all articles by Willem H. Buiter

Willem H. Buiter

Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University; Independent Economic Adviser; Independent

Ebrahim Rahbari

Citigroup London

Date Written: November 2012

Abstract

This study shows that Target2 net claims are a poor measure of Bundesbank loss exposure, and even more so of German loss exposure to the rest of the Eurozone. This is true even under plausible assumptions about a comprehensive break-up scenario that leaves Germany as the only member of the euro area and the Bundesbank as the sole owner of the ECB. In this implausible scenario, the discrepancy between the Bundesbank’s Target2 net credit balance and its likely loss exposure has two principal sources. First, the 16 national central banks (NCBs) that exit the Eurosystem (which will on balance be net Target2 debtors) and their sovereigns will not automatically walk away completely from their Target2 debts - defaulting on their debts with a zero recovery rate for the Bundesbank. Legally, the Target2 claims are not extinguished by exit from the Eurosystem by the debtor NCBs. Politically and realistically, many of the exiting NCBs would be able and willing to honour their obligations to Target2 in part or even in full. Second, in the comprehensive break-up scenario, future seigniorage revenues of the Bundesbank would likely go up, as it would be left with a larger share (in our example 100 percent) of the ownership of the ECB. Changes in German exposure to the rest of the euro area (or to the periphery) can differ in magnitude and in sign from Bundesbank exposure.

Keywords: Bundesbank, capital flight, ECB, eurosystem, imbalances, TARGET2

JEL Classification: E01, E42, E48, E63, F32, F33, F36

Suggested Citation

Buiter, Willem H. and Rahbari, Ebrahim, Target2 Redux: The Simple Accountancy and Slightly More Complex Economics of Bundesbank Loss Exposure Through the Eurosystem (November 2012). CEPR Discussion Paper No. DP9211, Available at SSRN: https://ssrn.com/abstract=2210160

Willem H. Buiter (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

420 West 118th Street
New York, NY
United States

Independent Economic Adviser ( email )

Independent ( email )

Ebrahim Rahbari

Citigroup London ( email )

33 Canada Square
London, E14 5LB
United Kingdom

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