Target2 imbalances, roll-over risk, the Euro and the preferential treatment of private debt in the Eurozone

In spain we got a public debt of nearly 100% of our gross national product … that’s perhaps why private debt got a preferential treatment, at least in our country

Real-World Economics Review Blog

One of the manifestations of the Euro crisis were and are the Target2 imbalances, large debts owed by Eurozone periphery countries to the core countries (graph).

Target2

Recently I understood that even well informed people still misunderstand these imbalances. They were not caused by new net lending and borrowing. The Target2 imbalances effectively saved the Euro when ‘private’ banks did not want to roll over their (large) short-term loans to southern Europe anymore, scrambled for the exit and the European system of central banks provided liquidity. Instead of owing large debts to French or German banks, southern European countries (including their national central banks) now owe large debts to northern European central banks and the ‘private’ banks are of the hook. It’s that simple.

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