Good bye Euro: expensive business

ln a letter from Mario Draghi to European Parliamentarians Marco Valli and Marco Zanni, the ECB recognizes the scenario of a potential withdrawal from the euro zone but poses at the same time a requirement to countries which might have intentions to leave the European currency: "lf a country were to leave the Eurosystem, its national central bank's claims on or liabilities to the ECB (Target2 Balances*) would need to be settled in full”**

Such a condition seems reasonable at first sight, but if we check the level of debt from some member countries, we get quickly to the conclusion that the requirement posed by the ECB might be very difficult to fulfil and in some cases it may look as unthinkable. Let's take ltaly’s example. Its Target2 negative balance is very high reaching EUR 363 billion. To put this in context, it corresponds to one fifth of the country's GDP. A similar situation is the case of Spain.

Other countries such as Greece seem to have a more manageable debt, e.g. only EUR 72 billion, but if we take into consideration its GDP, the Target2 negative balance at the ECB amounts to almost half of it. Additionally, the country faces a heavy repayment burden due to its public deficit.

Specifics to how the Target2 balance could be settled or in which currency (euro or a new country's currency) were not part of the letter from Draghi.

Target2 was once seen as a piece of financial infrastructure which allows the clearing of cross-border transfers within the euro zone. It mainly settles operations of monetary policy and money market operations. Since 2011 it has been a subject of heavy critics due to the huge imbalances which are seen as a hidden bailout in the form of unlimited credit facilities made available to the central banks of peripheral countries – Greece, Ireland, Portugal, and Spain by the Bundesbank.

* Target2 (Trans-European Automated Real-time Gross Settlement Express Transfer System is as an interbank settlement system

** Quote from Draghi’s letter to Mr. Marco Valli and Mr. Marco Zanni, Members of the European Parliament, on 18 Jan 2017 concerning Target2 balances and the Asset Purchase Program APP. You can find the letter here.

Source:

https://www.nzz.ch/finanzen/mario-draghi-fordert-rueckzahlung-der-schulden-teurer-abschied-vom-euro-ld.142461

https://voxeu.org/article/there-hidden-eurozone-bailout