Target2 balances reflect debt positions within the Eurosystem
Target2 is the payment system enabling direct transfers between commercial banks in the eurozone. These transfers can arise from many different sources, including trade transactions and interbank loans. Target2 payments are channelled via accounts that banks hold at their national central bank (‘NCB’). If the banks in a particular euro country are net receivers of cross-border payments via Target2, this results in that country’s NCB having a claim on the ECB, which acts as the central counterparty within the Eurosystem. The NCB in a euro country with a net payment outflow will have a liability to the ECB. The accounting entries representing the amounts that NCBs owe to or are owed by the ECB are referred to as ‘Target2 balances’.
Europe an debt crisis has resulted in substantial rise in Target2 balances
As the following chart shows, Target2 balances have risen substantially since the start of the banking crisis, and particularly as a result of the debt crisis.
The loss of confidence in vulnerable countries and their banks has resulted in a net capital outflow to banks in countries such as the Netherlands and Germany, whose creditworthiness is perceived to be higher. The drying-up of the interbank money market has certainly contributed to this. Banks in vulnerable countries have fund ed this net outflow by borrowing more from the Eurosystem, which since October 2008 has been providing unlimited credit to banks able to provide sufficient eligible collateral. Following the escalation of the debt crisis in the second half of 2011 the Eurosystem even started providing three-year loans (see for more information). The Eurosystem has introduced these exceptional emergency measures so as to avoid liquidity problems forcing banks to drastically reduce their lending to businesses and households. This is because a ‘credit crunch’ would cause great damage to the economies of vulnerable countries and possibly result in deflation.