Bogenberg Declaration and the German Bundesbank’s Target Credit

ifo press release, March 30th, 2012

With their Bogenberg Declaration published in December 2011, the trustees of the Friends of the Ifo Institute and Ifo’s Executive Board presented a list of statements aimed at preventing Germany from accepting excessive liability for the bailout packages provided by the community of states and the undermining of market processes caused by such packages.

The Declaration makes the following recommendations:

  • The ECB should limit itself to formulating monetary policy only and give up its role as Lender of Last Resort. More democratic bodies should be responsible for bailout packages.
  • The distribution of voting rights and decision-making rules in the ECB’s Governing Council should be revised.
  • Target credit should be settled once a year with interest-bearing, marketable collateral as in the USA.
  • The bailout package should be complemented by a clear crisis mechanism and an insolvency act limiting the bailout measures undertaken by the community of states to short-term liquidity loans and longer-term guarantees made after haircuts for specific periods.
  • In the mid-term banks should back up their government bonds purchases with equity and accept the state as a co-owner if necessary, if they do not have the resources to recapitalize on their own.
  • Countries that are not in a position to repay their debts must leave the monetary union.

In a new special issue of ifo Schnelldienst Prof. Hans-Werner Sinn, President of the Ifo Institute, focuses on the issue of Target Credit, offers an overview of the facts and compiles the latest data. With a letter from Bundesbank President Jens Weidmann, the German Bundesbank is moving away from its previous position that Target balances are irrelevant statistical items and a normal side-effect of money creation in the European Monetary System. The Bundesbank now shares our concern that the Target balances between central banks have grown substantially, and fears that the central banks in the euro area would not in a position to sustain potential losses. Meanwhile, Germany’s federal government is clinging to the view that Target balances do not constitute credit. Sinn contradicts this opinion in the latest Ifo Schnelldienst. He also says that:

  • Spain’s foreign debts are bigger than those of all the other crisis countries combined.
  • The Netherlands and Germany have accumulated Target claims worth the equivalent of over half of their net foreign assets.
  • Capital flight from Italy was compensated for by Target credit, which represents a figure that is higher than the country’s current account deficit for the last four years.
  • Over EUR 13,000 of Germany’s savings per member of the active population consists merely of Bundesbank Target claims.
  • In the last four years all that German has received for its current account surpluses with the euro area countries has been Bundesbank Target claims.

As things stand the Eurozone’s financial system cannot survive with its current institutional political and economical structures because it is destroying the capital market and burdening some countries with massive liability risks that have grown intolerably high by forcing them to supply credit to other countries without the consent of their respective parliaments. The Federal Republic of Germany’s Target claims already total EUR 547 billion today. If the deposit facilities filled by the “big bazooka” are activated, and if the ECB Governing Council’s plans to accept corporate loans of EUR 500 billion as collateral are realized further down the line, then Germany’s entire net foreign assets may be used up in the compulsory process of granting credit to Europe’s peripheral countries.

ECB policy not only means that German savers are being robbed of their normal interest and that their life insurance policies are finding it increasingly difficult to generate guaranteed interest, it also exposes Germany to tremendous risk for, should the euro break up, Germany is left with a claim against a system that no longer exists. Moreover, should individual countries leave the euro and declare insolvency, then Germany will bear the write-down losses from Target claims.

The proposal to introduce the US system in Europe (whereby Target debts would be settled once a year with interest-bearing, marketable collateral) does not mean abandoning Target balances altogether, or refusing to provide distressed countries with assistance. However, its implementation would put a stop to countries using the printing press and would ensure that Germany is not delivering its exports in vain.

Above all, this proposal would make Germany less susceptible to blackmail when it comes to decisions over further bailout packages. Everybody now knows that Germany has to support every bailout package because its growing Target claims are at stake. This situation is untenable if countries are to co-exist prosperously.


Sinn, Hans-Werner, "Die Target-Kredite der Deutschen Bundesbank", ifo Schnelldienst 65 (Sonderausgabe 21.03.2012), 2012, 03–34.