Fed versus ECB: How Target debts can be repaid

In February 2012, the Bundesbank had a TARGET claim of €547 billion on the Eurosystem. This column proposes a US-like system of marketable covered treasury bills that could be applied to a yearly settlement of TARGET liabilities.
Hans-Werner Sinn

VOX, www.voxeu.org, March 10th, 2012.

Now that Bundesbank President Jens Weidman has expressed his concern about the rising TARGET balances within the Eurozone in an official letter to Mario Draghi, the issue can no longer be swept under the carpet. In February, the Bundesbank had a TARGET claim of €547 billion on the Eurosystem, while the Dutch central bank had one of €171 billion in January. These claims constitute more than half of both countries’ net foreign wealth.

TARGET credit arose because some countries in the Eurozone’s periphery borrowed the electronic money printing press, with the approval of the ECB Council, and printed money galore. That money flowed into Germany and the Netherlands to buy goods or repay debts, primarily because Dutch and German commercial banks were reluctant to renew their interbank credit at conditions that could match those under which the ECB was allowing the national central banks to provide refinancing credit. The excess liquidity building up in the Netherlands and Germany induced commercial banks to borrow less from their respective national central banks, and even to lend their excess funds to them, making both the Bundesbank and the Dutch central bank net debtors of their commercial banking systems and replacing national savings, in terms of marketable assets, with mere TARGET claims on the ECB system that cannot be called due. While TARGET balances directly measure the net amount of money that flows across borders, they also indirectly measure a public credit flow between the national central banks of the Eurozone, as I first explained about a year ago. TARGET balances resemble the public loans granted via the European Financial Stability Facility and are primarily of a fiscal nature.

The real question behind Weidmann’s letter is whether and how the TARGET credit should be repaid. Sharing the opinion expressed in this year’s Annual Report on the European Economy by the European Economic Advisory Group (2012), I opt for settling the balances in a way similar to how the US system requires of its District Feds. In the US, there are 12 Federal Reserve districts, with TARGET-like balances (Interdistrict Settlement Account balances) arising between each of them. These balances have to be settled every April, by making those District Feds that over-used their money-printing presses cover the net outflow of money by bilaterally transferring to the corresponding other District Feds marketable assets (originally "gold-backed securities") which they cannot issue themselves. Technically, this is done by reallocating ownership shares in, and annual interest distribution of, a joint clearing portfolio run by the Fed.

To calculate the repayment rate, it is not the closing balance that is considered, but the average increase in the Interdistrict Settlement Account liability over the previous year. This implies that some balances can indeed remain after the cut-off date, but the increase in such balances is greatly reduced.

This is shown in Figure 1 below. It compares the evolution of the TARGET and Interdistrict Settlement Account liabilities in relation to the corresponding GDP. It can be clearly seen that such balances in the US rose much more slowly during the crisis than in the Eurozone. That resulted, for one thing, from the fact that in the US it is not attractive to take on Interdistrict Settlement Account liabilities, which prompts the deficit District Feds to try to reduce their liabilities in order to avoid, come April, losing part of their titles in the Fed’s clearing system. The clear drop in the liabilities in the run-up to April 2009 can be attributed to this effect. For another, there is the braking effect that occurs through the enforced repayment itself if and when District Feds do not manage to reduce their liabilities ahead of time. In April 2010, for instance, Interdistrict Settlement Account liabilities of around $190 billion were settled by transferring ownership shares within the Fed portfolio. In April 2011, the settlements were much smaller, since Interdistrict Settlement Account liabilities had been in continuous decline throughout the previous year, rising again only at the beginning of the year.

At the end of 2011, Interdistrict Settlement Account liabilities amounted to $337 billion, or 2.3% of GDP, while TARGET liabilities amounted to €796 billion, or 8.7% of GDP. Comparatively, the European balances were around four times as large as the US ones, despite the fact that the financial crisis started in the US and that the Fed pumped far more money into the economy than the ECB did. If the Bundesbank were to be repaid according the US rules for the TARGET claims it accumulated during the crisis (May 2006 to April 2012), it would receive an estimated €336 billion in marketable gold-backed securities.

The question is how to adopt in Europe a system similar to the US one. It would certainly be no solution to allow the deficit countries to settle their balances with normal government bonds that they issue themselves. That would be akin to jumping from the frying pan into the fire.

In its just-released 11th Report on the European Economy, the EEAG proposes the introduction of a system of marketable covered treasury bills that they dub Euro Standard Bills, and that would be standardised and collateralised by each corresponding government with state-owned real estate or senior rights to future tax revenue. In the opinion of the Advisory Group, these bills could be applied to a yearly settlement of TARGET liabilities.

A simple, minimum solution that could be useful has been suggested by former Bundesbank President Helmut Schlesinger. He would like to see the TARGET liabilities encumbered by progressively higher punitive interest rates that would be paid by the debtor to the creditor countries.

In any case, the Eurozone needs a shock-absorbing system that can dampen the extreme spikes in the TARGET credits. A private banking account’s overdraft facility, after all, cannot be expanded at will either.


European Economic Advisory Group (2012), “Report on the European Economy”, CESifo 27 February.

Sinn, H.-W. and T. Wollmershäuser (2011), "Target Loans, Current Account Balances and Capital Flows: The ECB's Rescue Facility," CESifo Working Paper 3500, 21 June, and NBER Working Paper 17626, November. 

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