Working Paper: CEPR ID: DP9211
Authors: Willem H. Buiter; Ebrahim Rahbari
Abstract: This study shows that Target2 net claims are a poor measure of Bundesbank loss exposure, and even more so of German loss exposure to the rest of the Eurozone. This is true even under plausible assumptions about a comprehensive break-up scenario that leaves Germany as the only member of the euro area and the Bundesbank as the sole owner of the ECB.In this implausible scenario, the discrepancy between the Bundesbank?s Target2 net credit balance and its likely loss exposure has two principal sources. First, the 16 national central banks (NCBs) that exit the Eurosystem (which will on balance be net Target2 debtors) and their sovereigns will not automatically walk away completely from their Target2 debts - defaulting on their debts with a zero recovery rate for the Bundesbank. Legally, the Target2 claims are not extinguished by exit from the Eurosystem by the debtor NCBs. Politically and realistically, many of the exiting NCBs would be able and willing to honour their obligations to Target2 in part or even in full. Second, in the comprehensive break-up scenario, future seigniorage revenues of the Bundesbank would likely go up, as it would be left with a larger share (in our example 100 percent) of the ownership of the ECB.Changes in German exposure to the rest of the euro area (or to the periphery) can differ in magnitude and in sign from Bundesbank exposure.
Keywords: Bundesbank; Capital Flight; ECB; Eurosystem; Imbalances; Target2
JEL Codes: E01; E42; E48; E63; F32; F33; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| misinterpretation of target2 balances (F32) | perceived financial stability of the eurozone (E66) |
| target2 net claims (F16) | bundesbank loss exposure (E58) |
| exit of national central banks from the eurosystem (E58) | assessment of bundesbank exposure (E58) |
| political factors (P16) | outcomes discussed (I14) |
| future seigniorage revenues (H69) | financial outcomes for the bundesbank (E58) |
| structural changes in the eurosystem (E58) | financial outcomes for the bundesbank (E58) |
| bundesbank exposure to the giips countries (F33) | german exposure (N24) |