Everybody knows much of the City of London was vehemently opposed to Brexit because of fears of what might happen to banks’ interests if so-called “passporting” rights into and out of the European system were lost.
What is less talked about, however, is Brexit’s impact on the European payments clearing system, Target2 — and how the passporting issue connects by way of Target2 to the realm of sovereign monetary policy.
At the absolute heart of the matter is the status and treatment of payment systems worldwide, and whether or not they can really be treated as something independent and thus distinct from national monetary policy (and hence open to commercial competition) — or as integral to sovereign interests. Read more
In celebration of the Bank of England’s One Bank Research conference, the Bank has, for the first time, produced information on its balance sheet going back more than three centuries “in a user-friendly spreadsheet form and as continuous time series.”
There’s lots to digest in there, but one thing we’d like to focus on is the size of the balance sheet relative to the UK economy. Bond-buying initiated under the Bank’s quantitative easing programme boosted the relative size of the Old Lady’s holdings by a large amount relative to the recent past. Relative to the full history, however, QE looks somewhat less exceptional: Read more
Ok, this is pretty excruciating, but it’s an important (albeit emotional) debate…
Is the Eurosystem’s Target2 payment system toxic for the people of Germany? Should they be worrying like hell about this (click to expand):
Look, look: it’s Target2 imbalances… rebalancing… slightly.
How long can this go on? (Click to enlarge.)
We wade into choppy waters here. But, we couldn’t help ourselves…
Karl Whelan, expert on all matters Target2 and arch nemesis of Hans-Werner Sinn, has encapsulated his views on Target2 a.k.a “why Hans-Werner Sinn is so very wrong about everything” in a 37-page powerpoint presentation on Wednesday. Read more
Here’s an innovative way of looking at the Eurozone crisis. Not so much the periphery states being reckless, but some states taking advantage of what should have always been seen as a collective pool of wealth.
We’re talking a tragedy of the commons. Read more
In my remarks today, I would like to share with you some concerns about the present state of the euro area money markets, which are characterised by segmentation between cash-rich and cash-poor banks and a fragmentation along national lines. I would also like to offer some thoughts on how proper money market functioning can be restored.
So starts a recent speech by Benoît Cœuré, member of the Executive Board of the ECB, which should be required reading for everyone interested in the fragmentation of the European money markets. Read more
(Alternate Game of Thrones title: A Storm of Soros)
It’s got a lot of attention so we thought we should throw it up so… here, in its summarised glory, is George Soros’ speech from the Festival of Economics at Trento, Italy. Read more
Uncontroversial stuff we assume… Read more
Spain’s government has been left looking increasingly desperate/reckless/ineffective by its plans to rescue Bankia, as today’s FT describes:
Mr Rajoy and his government are facing growing domestic criticism over repeated errors of strategy and communication, which that have given an impression that Madrid has run out of ideas on how to handle its financial and economic crises. Read more
The European Central Bank has recently started talking more about risk, and in particular the risks to its balance sheet. Yesterday, Standard Chartered analysts Thomas Costerg and Sarah Hewin had a note out talking about how the ECB was concerned about capital outflows from the periphery being replaced by TARGET2 inflows, and how TARGET2 imbalances might lead to a more fragmented policy. From StanChart:
ECB President Draghi recently hinted that managing risks was his utmost priority, further differentiating the ECB from other major central banks (Japan, US, UK), which have shown less reluctance about conducting broad-based quantitative easing (QE).
Any discussion that involves a discussion of the Euro-system’s TARGET2 mechanism carries a big fat tail-risk that this correspondent’s head will explode. But we’ll run that risk in the interests of readers…
Christian Schwarz and Matthias Klein at Credit Suisse have produced a tome entitled, rhetorically: Will Germany Continue to Pay? Read more
There are two stories regarding capital flows and the eurozone: flows between member states, and flows to and from the eurozone as a whole.
We’ll ignore the flows into Germany and away from Italy for a moment. Although only for a moment, because the intra-euro capital flows actually appear in the capital flows to and from the eurozone, if only indirectly. Read more
For anyone who fancies a little Target2 controversy on a Tuesday afternoon… we present, straight from the horse’s mouth, the Bundesbank’s own thoughts on the problem of Target2 imbalances via its annual results report:
Izy’s had a go. Tracy’s had a go. Neil C’s had a go. Martin Wolf has had an epic go. And here, to add to the vexed mix, is more on the subject from Greg Fuzesi of JP Morgan.
Full details in the usual place, but the bank’s latest ready reckoner on imbalances across the Eurosystem includes this stylized look at TARGET2… Read more
One of the mysteries, to me, of the Greek crisis has been why there should be any deposits left in the local banks. All those with more euros than they need in order to eat and stay warm and dry should have moved their savings to, say, Deutsche Bank in Frankfurt, while they still can. The answer, of course, is that they have. The Greek system has only survived this slow-motion bank run thanks to the German banks sending it right back to them, via the Bundesbank, through the Trans-European Automated Real-Time Gross Settlement Express Transfer.
What, never heard of TARGET? Do keep up. It’s an international version of the transmission system which allows money deposited in Barclays in Leeds to be drawn out of Lloyds in Luton. It matters not if money is consistently drawn from Luton and consistently deposited in Leeds, since other mechanisms cycle the money round, whether by Lutonians buying things made in Leeds, or by the state’s great tax and spend machine. Read more
News that the Bundesbank is fast approaching a zero domestic asset balance-sheet situation from a eurozone Target2 payment perspective has caused a bit of a stir in the financial commentariat space.
Critics suggest it’s largely unimportant, since there is no limit on Bundesbank transfers even if it runs out of assets. Read more
Anyone betting that France will make it through the eurozone crisis because it’s a AAA country (just about), might want to a look at this chart and think again: