A Complete Guide to European Bail-Out Facilities – Part 2: Target2 & EFSF / ESM

Today we present the Target2-system and the fiscal bail-out facilities in our series on European efforts to bail out itself.
For new readers,
check out part 1 

  1. Tran-European Automated Real-time Gross Settlement Express Transfer System – TARGET2

In order to facilitate cross-border financial transactions within the currency union an interbank payment system was constructed with the various national central banks as intermediaries.

A Spanish construction company, say, needs a new crane and buy one from one of the major German crane manufactures. We can assume the construction company got a loan from one of the rapidly expanding Spanish banks which can be used to buy German goods. The bank on the other hand cannot fund itself in international money markets and domestic savings cannot keep up with credit demand. However, they can issue a commercial paper which can be used as collateral for a loan with the Banco de España. The transaction is thus helped by the “temporary” credit line provided by Banco de España as part of the Target2 system.  As an offset to the monetary financial institution (MFI) loan on the Banco de España balance sheet we find a Target2 liability.

The European Central Bank (ECB) is obviously balanced as the Banco de España liability is perfectly matched by a Bundesbank Target2 asset.

Euros created on back of dubious Spanish collateral are transferred to the German bank via the Bundesbank which get a Target2 asset as an offset.  The German bank uses the claim on the Bundesbank to create a deposit for the German exporter.

This is how a Target2 imbalance is accumulated. However, in “normal” times the German exporter would save his money or invest directly in international claims. Somehow, the capital would find its way back through the chain cancelling the previous Target2 transaction.

However, if the Germans in this case were afraid of the solvency of its counterpart and capital flows dried up, Target2 claims and liabilities would never cancel. As a matter of fact, there is nothing inherent in the system that prohibits infinite Target2 claims and liabilities from accumulating.

Within the Federal Reserve System for example, any imbalance between regional Federal Reserve banks must be settled annually. No such thing exits within the ESCB-system.

Target2 T-account illustration

Source: Bawerk.net

A long story short, the Target2 system made possible a massive unfunded capital transfer from the north to the south. The unsustainable capital consumption in the south and the pretense of saving in the north were allowed to reach unimaginable proportions.

We have looked through every one of the seventeen NCBs in order to see just how big this unintended bail-out was at the height of the crisis. Den Rest des Beitrags lesen »

A Complete Guide to European Bail-Out Facilities

Part 1: ECB

Over the last couple of years we have been tracking the various bail-out schemes concocted by ingenious Eurocrats. It is truly fascinating to observe these people get entangled in one lie after another; always trying to resolve the old lie with a new one. The hard cold truth is of course that Europe is bankrupt! They cannot repay what they owe and they cannot maintain a level of consumption that for most are far higher than production. A deep-seated fundamental restructuring is long over-due, but the Eurocrats have an uncanny ability to kick the proverbial can. Our main concern today is what they will do when they run out of road. But that is a discussion for another time.

The road of course ends when there is no more real capital to leverage. We see signs of this already! In the meantime, every time our Eurocrats need to circumvent self-imposed rules or see the same signs as we do, a new destructive program, or bazooka, is launched to save Europe.

We will take you through all of these schemes in order to make a small, but important, contribution to educate our readers about the utter destructiveness the European elite is prepared to go through in order to maintain status quo!

We will try to keep a chronological order, but often it will be impossible as these arrangements run in parallel or have become too intertwined to really be easily separated. Some plans are just that, deliberate plans while others stem from poor designs in the euro-system that ended up as far larger bail-outs than the ones contrived by Eurocrats.

Before we start our exercise in European folly it is important for the reader to understand certain concepts crucial to modern economies.

First of all, the ultimate measure all tend look to when assessing the overall health of an economic system, namely gross domestic production (GDP) does not measure production at all. It measures the broadest level of monetary inflation possible. It takes into account the monetary base as given by the central bank and on top of that total commercial banking leverage. In addition, it account for overall velocity. GDP thus measure the level of excess the government can allow itself. It measures the relative debt share and it measures the amount of deficits any given government can maintain through inflation.

Secondly, as implied by our GDP discussion, it also provides a direct link between overall banking leverage and “growth”. In other words, unless the banking system is healthy enough to maintain a constant level of credit inflation GDP growth will come to a halt. It is imperative for the government to make sure the banking system is free to inflate because they will both rise and fall together. Any bail out of states is bail out of banks; any bail out of banks is bail out of states. Realize this, and everything else falls into place. Den Rest des Beitrags lesen »