I have commented on Target2 liabilities before.

Perhaps a Mish-modified translation from the Welt article Imbalance in the Euro System Reaches a New Record will ring a bell.

The central banks of Germany's euro partners Italy, Spain and France owe the Bundesbank almost a trillion euros . This is a new high. - more than ever before. Tendency continues to rise. There is no security for this money.

Read that last line again and again until it sinks in. Italy is €464.7 billion in the hole. Spain is €376.6 billion in the hole.

Debtors owe Germany, the Netherlands, and Finland over €1.157 trillion.

In May, Italian liabilities increased by almost 40 billion euros.

"Capital flight to Germany is in full swing," says Hans-Werner Sinn, longtime head of the Ifo Institute and one of the most prominent economists in the Federal Republic.

Originally, Target2 was designed to facilitate cross-border transactions within the eurozone. The system achieved this goal. From the point of view of critics, this means that the Deutsche Bundesbank provides long-term unsecured and non-interest-bearing loans to the central banks of other eurozone countries , especially the central banks of southern countries Italy, Spain and Portugal.

Fundamental Eurozone Flaw

Target2 is a fundamental problem of the Eurozone.

  • The ECB guarantees these loans.
  • As long as they are guaranteed, then hells bells, why not make more loans?

Germany Will Pay

Germany will pay one way or another. Here are the possibilities.

  1. Germany and the creditor nations forgive enough debt for Europe to grow. This is the transfer union solution.
  2. Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe
  3. Breakup of the eurozone

Those are the alternatives.

Germany will not allow number 1. It is unreasonable to expect number 2 to last forever. The only door left open is door number 3.

The best move would be for Germany to leave the eurozone. Germany is in the best shape to suffer the consequences.

Unfortunately, the most likely outcome is a destructive breakup of the eurozone, starting in Italy or Greece.

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Mike "Mish" Shedlock

Capital Flight in Eurozone Continues

Capital flight from one Eurozone country to another, continues to rise. That capital flight is a measure of trust of of a nation’s banks.

Another Look at Capital Flight in Italy and Spain: ECB’s Target2 Explanation is False

The ECB claims that Target2 does not represent capital flight. Evidence says the ECB is wrong, especially for Italy and Spain.

Italy Capital Flight Escalates: Highest Two-Month Total Ever

Capital Flight in Italy escalates at a record pace. It's seen in Target2 balances and spreads rather than an EM crisis.

Eurozone Capital Flight Intensifies: Target2 Imbalances Widen Again

A quick perusal of Target2 Balances for January shows capital flight from Italy and Spain to Germany intensified again.

Capital Flight in Italy, Spain Intensifies: Italy Target2 Balance Hits Record Negative

The ECB statistical data warehouse released Target2 Balance figures today. The numbers are reflective of intensifying capital flight in Italy and Spain.

US, Germany, Japan in Manufacturing Recessions: Full-Blown Recessions Coming Up

The US, Japan, Germany, and the Eurozone manufacturing PMIs are in contraction. Recessions will follow.

China's Currency Bluff to Stop Capital Flight

Looking for a currency bluff? I have one!

Capital Flight: Money Leaving China at Record Rate

China is fighting "abnormal" cash flows. It's not surprising in the least.

Italy Target2 Imbalance Hits Record €432.5 Billion as Dwindling Trust in Banks Plunges

Contrary to ECB propaganda, Target2 imbalances are a direct result of an unsustainable balance of payment system. The imbalances represent both capital flight and debts that can never be paid back. If you think Italy can pay German and other creditors a record €432.5 Billion, you are in Fantasyland.