What are the accepted levels of TARGET2 debts?
It has been accepted by many commentators that Germany is a depositor in TARGET2 in an amount of just above €1 trillion, and that Italy and Spain are borrowers in amounts around €½ trillion each.
These figures, though, are determined after a novation and netting process is applied to the end-of-day balances on the 600 current accounts that are held amongst the ECB and the central banks to process cross-border TARGET2 payments.
The novation and netting kick in during TARGET2’s end-of-day cycle around 18:30 CET and are reversed less than an hour later within TARGET2’s start-of-day cycle for the next-following day. Debits and credits should be passed across the 600 accounts to lend operational substance to the novation and netting, but what these are is not public.
The balances before the novation and netting at the end of October were €3 trillion. The novation and netting reduced them to €1.2 trillion of borrowers and €1.6 trillion of depositors, leaving a net borrower position of €0.4 trillion at the ECB.
This €0.4 trillion is a contingent liability of each member state in line with their central bank’s Capital Key in the ECB, but, being only a contingent liability, it does not appear in ‘General government gross debt’.
It is assumed that the €1.2 trillion of net borrower positions do not appear in the ‘General government gross debt’ of the respective member state, despite their being debts of their central bank to the ECB.
That being the case, the further layer of €1.4 trillion of gross debts – matched by gross deposits – will not appear either. These never see the light of day in the ECB reports. It is unclear, therefore, whether the borrower’s debt is owed to the ECB or to other central banks. Either way, it is a debt of the central bank and should appear in ‘General government gross debt’.
These accounting treatments make a nonsense of the term ‘General government gross debt’.
What needs to be done?
It will no doubt come as an unpleasant surprise to Germany that its net depositor position in TARGET2, huge as it is at €1.1 trillion, could be €2.5 trillion on a gross basis.
Who owes what to whom in total? And during the whole day rather than just for an hour at the end of it? These are the questions that accounts should answer but they do not in this case.
The status quo is not good enough for a matter of such huge importance: the current information gap around the TARGET2 balances is part of the threat to global financial stability presented by the invisible debts bearing upon EU/Eurozone member states.
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