What are Target2 balances?
Target2 balances represent claims and liabilities of national central banks vis-à-vis the ECB, and their fluctuations give an indication of a country’s capital flows. An increase in the balance indicates net inflows of capital and vice versa (see also the DNBulletin issued in April last year). Until 2009, these Target2 balances were very small, but between 2009 and 2012 claims and liabilities have risen sharply due to crumbling confidence in stressed countries and their banking sectors. Capital outflows were cushioned by the Eurosystem, which has been extending unlimited credit to banks since October 2008 - on the condition that they provide adequate collateral.
Imbalances are narrowing, but the decline is stagnating
Since July 2012, Target2 balances have been declining to some extent. At that time, the aggregate Target2 balance of central banks with a positive position amounted to some EUR 1,000 billion, balanced by Target2 liabilities of other euro area central banks. In the meantime this amount has declined by about 30%, which represents a marked turnaround. In the past few months the pace of the decline has been slowing down, however. [Figure 1].