… say Willem Buiter, Ebrahim Rahbar and Jürgen Michels with Citi (Link is now working, thanks again to Lorcan Roche Kelly for the pointer to the version on the NBER server)
Here are the main points of their paper:
Global Economics View: TARGETing the wrong villain: Target2 and intra-Eurosystem imbalances in credit flows
We review recent articles by Martin Wolf and Hans-Werner Sinn on the role and interpretation of intra-Eurosystem (Target2) credit imbalances. We dispute their conclusions on both conceptual and empirical grounds.
Target2 is the payment and settlement system in the euro area for euro transactions between national central banks (and some private participants) with central bank money.
Increases in Target2 net liabilities of, say, the Central Bank of Ireland (CBI) should not be automatically interpreted as financing of Irish current account deficits.
The ECB, like any other major central bank, targets an interest rate, not money or credit stocks – those are endogenously/demand-determined by commercial banks.
Increases in CBI Target2 net liabilities thus do not cause reductions in central bank credit for German, or indeed any other euro area country’s, banks.
The stock of net Target2 claims of the Bundesbank does not reflect its exposure to risk and financial losses of other euro area central banks – the right measure would be the total exposure of the Eurosystem multiplied by the adjusted ECB capital share of the Bundesbank.
The Interdistrict Settlement Account procedures of the Federal Reserve System do not prevent sustained interdistrict credit imbalances.
Intra-Eurosystem credit and Target2 imbalances primarily reflect the difficulty of obtaining private market funding for euro area periphery banks. While a serious issue, we argue this is conceptually distinct from the case made by Wolf and Sinn.