43 Responses to The stealth bailout that doesn’t exist: debunking Hans-Werner Sinn

  1. dsquared

    I think that Patient Zero here is this paper by Peter Garber from 1998


    The point is that, pre-EMU, there was a genuine issue here because in the pre-Euro European Monetary System, similar imbalances could arise, and they would then take the form of genuine credit exposures between central banks. They still wouldn’t constitute monetary financing of anyone’s fiscal balance though – this is just a case in which Wolf and Salmon have, uncharacteristically, got confused between the fiscal constraint and the capital account constraint.

    In general, these arguments tend to start from the premise that the Euro won’t behave like a currency union, and then establish the conclusion that the Euro can’t work as a currency union. There are imbalances between regional Federal Reserve Banks in the USA and nobody cares – they’re rebalanced with a transfer of gold certificates every April. The issue here is whether the euro has the political commitment to sustain this sort of regional banking crisis and talking about TARGET imbalances doesn’t really clarify any issues of any kind.

    Also worth looking at


  2. LorcanRK

    Well done Olaf on trying to shine a light on the murky world that is TARGET2.

    The Bundesbank put out a press release in February on the growth in balances http://www.bundesbank.de/download/presse/pressenotizen/2011/20110222.target2-salden.en.php that also tries to explain the growth.

    I think you are spot on when you say the imbalances are a result of, rather than a reaction to, the crisis. It is an important distinction that many, unfortunately, seem to be getting wrong.

    • Thank you very much, Lorcan. I did not know this press release, tbh. It explains some things in a better way than the monthly report. Will add an update to the orignial post, soon.

  3. “I think there is convincing evidence that his conclusions are plainly wrong and should not be taken seriously.”
    I agree, but not too many people will argue with Martin Wolf. He has simply no understanding of how the Eurosystem works.


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  5. Congrat! Excellent analysis. Although I guess this won’t do any harm to HWS arguments because what HWS says is true ex cathedra. At least in Germany. But let’s look at the bright side of the whole discussion: suddenly people dig into the arcane rules governing the most unaccountable powerful institution in Europe. Which is definitely a good thing.
    I think the most ridiculous claim was the crowding out argument. Lending by commercial banks in Germany is not reserve-constrained. It depends on demand (credit-worthy customers) and capital (Basel). Banks comply to reserve-requirements ex-post and not ex-ante. There’s no hotline from the loan desk to the back-office whether enough reserves are available.

    PS: 29th June would be great!

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  10. Pingback: The Irish Economy » Blog Archive » Professor Sinn Misses the Target

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  12. Finster

    Sinn uses Target2 to describe a simple accounting truth: A deficit is always financed. The export surplus of german exporters shows up on the balance sheet of the exporters banks and have been financed through them (via transactions with the importers banks in Greece and Ireland). The credit binge in Greece and Ireland had a deflationary and credit contracting effect on Germany. The higher interest rates paid on Greek and Irish debt crowded out lending to Germans and the German government. This explains the anemic, deflationary developement of Germany during most of the monetary union.

    Interestingly enough, now Germany for years will have too low interest rates for its developement while it seeks to catch up with the inflated periphery. The only chance to get productivity differentials back on a level course.

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  17. Pingback: The ECB’s Target2 activities are not constraining German credit growth « naked capitalism

  18. Pingback: The ECB’s Target2 activities are not constraining German credit growth | Jackpot Investor

  19. charles@monneron.org

    Regarding what the Buba is saying
    “Any actual loss would always be borne by the Eurosystem as a whole, regardless of which national bank records it. The cost of such a loss would be shared among the national banks in line with the capital key.”

    This is flat wrong. Art 32.4 of Lisbon Treaty indicated that the Governing Council MAY indemnify losses. MAY and not SHALL ! If there is a loss of, say, 50 bln euros at the Greek Central Bank, the Governing council will have to take a positive decision to indemnify it, and I wouldn’t want to be in the shoes of the German or Finnish member of the Governing Council that will have to attend at that fateful meeting.

    May be it explains why Weber decided he would have none of it…

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  23. javier navascues

    Thanks <Olaf, your article took me back 50 years to when I studied "monetary economics". But what astounds me is that people of the category of M Wolf and Sinn should have such a poor working knowledge of the EMU and on top of that they purport to give us lessons! With the Germans as usual playing the victim. I knew I had to know more in order to write/talk about these matters, but these guys are not even aware of their ignorance! This is really scary. Does anyone have the right answers?
    Keynes, please come back.

  24. hkaspar

    Sorry but Storbeck gets it pretty wrong too. Target2 deficits do allow the funding of consumption and investment that otherwise would not have happened. Calling this a “stealth bailout” for the peripheral economies and their financial systems is entirely appropriate.

    (maybe Storbeck thinks erroneously that only goverments can be bailed out).

    Second, Target2 deficits pose a risk to the German taxpayer, as they imply a risk that the ECB may have to recapitalized by its members if the Bank of Ireland cannot settle its liabilities.

    Where I agree with Storbeck is that more central bank credit to Irisk banks does not imply less credit to the German economy.

    Sinn’s entire argument is discussed here:


    Henry Kaspar

  25. No so.

    Ignorance is sometimes bliss. Imagine the public reaction if the Los Angeles Times and the San Francisco Chronic/e were to come out with headlines reading ‘California Faces a Multibillion Deficit in Payments to Rest of Country.” Could Sacramento have refused to respond in some way?

    As an empirical economist, I very much welcome detailed government statistics on almost anything including international trade, yet as a political economist and citizen, I often sympathize with my old teacher at the University of Chicago, Lloyd Mints. who contended that U.S. trade policy would be far better if, like California, the U.S. had no such data.

    — Milton Friedman, Statement at Hearings before the U.S. Trade Deficit Commission

    Friedman made these remarks in conjunction with the State of California running for decades a trade deficit with the rest of USA. Would you call this an ongoing “stealth bailout” of California by the rest of the US States?

    Sinn and you are attacking a straw man. The Target2 System is the settlement system of our common currency area. There’s nothing fundamental wrong with it and the national balances in the system simply mirror commercial activities in the Eurozone.

    The Target2 debate is fundamentally flawed and dishonest. Instead of going into the arcane details of the various national Target2 balances the honest question would be: Do we want a common currency with Greece or for that matter with Ireland?

    If YES then the Target2 system is perfectly fine and its balances are whatever they are. We can then move on to the question of how to address possible imbalances. Which means we talk about about aligning surplus with deficit members in the Eurozone.

    And if NO we can stop worrying and discussing about Target2 balances at all and concentrate on how to dissolve the common currency area. By doing so the Target2 system becomes irrelevant anyhow.

    The same reasoning pertains to your argument for “consumption and investment that otherwise would not have happened.” Here you introduce the implicit assumption that Ireland and Germany have different currencies.

    Of course the German tractor could’t be bought even by a perfectly solvent Irish farmer if the exchange rate is unfavorable for German exports to Ireland. But for time being an Irish Euro is as good as an German Euro.

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  35. Stuart houghton

    This is central bank financing of govs. Central bank prints money -> bank (to replace capital flight via central bank EULA as done in Ireland and Greece) this replaces bailout money. Also who would be the major purchasers of local gov debt, the local banks. My bet is the target2 is financing local banks (suffering capital flight) also bolstering their ability to fund their own govs through purchases of local gov bonds which then get parked at the ecb through refinancing ops.

  36. Hi,
    I have been reading your interesting post and I kept wondering: shouldn’t the collateral given by the Irish farmer to its local commercial bank and then deposited at the ECB, go to the German Bundesbank in case the “deficit” isn’t net out? In other words, it is true that the German bundesbank is being selling its portfolio assets to leave the money base unchanged, but it would gain the ownership of the greek government bonds in case the deficit country did not closed its exposure (which happens in the case the Irish farmer defaults on its loan and the Greek commercial banks fails to repay its loan to the Irish Central Bank).

    Many thanks

    • The Bundesbank ins’t selling anything with regard to the Targert2 operations, as Karl Whelan explains in his excellent post refuting the arguments made by Tornell and Westermann:

      “The idea that the Bundesbank is about to “run out of money” – “the Bundesbank will soon exhaust the stock of securities that it can sell to fund further loans to the Eurosystem” – is completely without basis in reality. Still, the stuff about the Bundesbank’s gold holdings and the German public not wanting to sell it will appeal to paranoid goldbugs everywhere.”

  37. Pingback: Target2 Imbalances and German Democracy: Surmountable Contradictions? | eutopialaw

  38. Interesting! I would say you are right. I can imagine Sinn has reacted?
    Perry Feenstra
    Chief economics-desk RTL News, The Netherlands

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