Yet another substantiation of just how much the entire system is (necessarily) dependent on ECB funding/backstopping.
By: Hans-Werner Sinn
The amount of the ECB’s “replacement lending” is shown by the so-called Target2 account, which measures the deficit or surplus of a country’s financial transactions with other countries. As the account includes international payments for both trade in goods and financial claims, a deficit in a country’s Target account indicates foreign borrowing via the ECB, whereas a surplus denotes foreign lending via the ECB.
The balance is not reported on the ECB’s balance sheet, since it is zero in the aggregate, but it does show up on the respective balance sheets of the national central banks as interest-bearing claims against, and liabilities to, the ECB system. Until mid-2007, the Target accounts were close to zero, but since then, they have grown by about €100 billion per year.
For example, the Bundesbank’s Target claims ballooned from €5 billion in 2006 to €323 billion by March 2011. The counterpart to these claims were the PIGS’ liabilities, which had grown to about €340 billion by the end of last year. Interestingly, the PIGS’ cumulative current-account deficits from 2008 through 2010 were of roughly the same order of magnitude – €365 billion, to be precise.
Had the ECB failed to finance these deficits, the PIGS would have had a hard time finding the money to pay for their net imports. If they succeeded at all, high interest rates would have induced them to tighten their belts, and their current-account deficits, which in the case of Greece and Portugal exceeded 10% of GDP, would have diminished.