Eurozone: Deepening TARGET2 Imbalances
By Georgi Ninov - Research Analyst
The outstanding TARGET2 balance of the aggregate Eurozone for August 2017 stood at –212.9bn EUR – the largest deficit in the history of the TARGET2 system – which has continued the trend since October 2014. The deficit increased by more than 50% compared to August 2016 and this sharp development has led to some worries across the continent mostly due to similar observations during the European debt crisis of 2010-12.
TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) is the Eurozone's real-time gross settlement (RTGS) system and the leading European platform for large scale euro payments. It is regarded as the foundation of the EU's financial integration. Imbalances arise when the banking system of one country has more inflows than outflows of payments (or vice versa) so that it acquires a claim (or deficit). Therefore, TARGET2 imbalances show the cumulative net payment flows within the euro area.
As of August, the countries that are running the biggest deficits are Italy (-414.2bn EUR) and Spain (-384.4bn EUR) - an amount that roughly mirrors the TARGET2 claims of Germany (852.5bn EUR). The roots of Italy's imbalance can be traced to the sovereign debt crisis in the Eurozone, when foreign investors have cut their exposure to Italian bonds. Other factors also weigh in, especially the ECB's quantitative easing (QE) program which has prompted Italians to decrease their holdings of the country's bonds in favour of higher-yielding foreign assets.
The ECB itself is seeing the rising aggregate deficit as a by-product of the QE program and not an especially alarming issue. Nevertheless, doubts about capital flight from the high-deficit running economies are in place, despite the seemingly healthy growth of the EU economy in recent times.