The destruction of the euro

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by Alasdair Macleod, GoldMoney:

The Eurozone is bust. The deterioration of TARGET2 imbalances have been hardly noticed, but in recent months it has been alarming. Despite official denials over the years that it is a matter of concern, it is increasingly obvious that the national banks of Italy, Spain and other nations with increasing bad debts are hiding them within the TARGET2 system. The first wave of Covid-19, which is leading to bankruptcies throughout the Eurozone, is now being followed by a second wave, which will almost certainly take out a number of important banks, in which case the cross-border euro system will implode.

Introduction

If ever there was a political construct the unstated objective of which is to enslave its population, it is the European Union. Its opportunity stems from national governments which, with the exception of Germany and a few other northern states, had driven or were on the way to driving their failed states into the ground. The EU’s objectives were to support the policies of failure by corralling the accumulated wealth of the more successful nations to fund the failures in a socialistic doubling-down, and to accelerate the policies of failure to ensure that all power resides in the hands of statist looters in Brussels.

It is Ayn Rand’s vision of the socialising state as looter in action.[i] All of surviving big business is aligned with it: those who refused to play the game have disappeared. Senior executives with extensive lobbying budgets are no longer at the beck and call of contentious consumers and have hollowed out their smaller competitors. They have opted for the easier non-contentious life of seeking favours of the looters in Brussels, enjoying the champagne and foie gras, the partying with the movers and shakers, and the protection they bribe for their businesses.

It is a corrupt super-state that evolved out of American post-war policy — the child of the American Committee of United Europe. Funded and staffed by the CIA in 1948, the committee’s objectives were to ensure the European countries bought into a US-controlled NATO, in the name of stopping Stalin’s westwards expansion from the post-war boundaries. This was the official story, but it is notable how it formed a template for subsequent American control of other foreign states. It is the action of the jewel wasp that turns a cockroach into a zombie, so that its lava can subsequently feed off it.

This European cockroach is now in the final stages of its zombified existence. In Brussels they don’t realise it, but they are partying into the dawn of the next world, and they will have nowhere left to go. Outside of the Brussels hothouse and EU capitals it is hard to discern any support for a failing political system, beyond simply keeping the show on the road. The German population grumbles about lending their money to economic failures, but like any creditor deep in the hole they will remain blind to the deeper systemic problem for fear of its collapse. At the other extreme are the Greek socialists who claim Germany still owes them for their brutality and destruction seventy-five years ago. It is a Faustian pact between creditors and debtors to ignore the reality of their respective positions. It is the method of imperialism; but instead of being applied to other nations, Brussels applies imperial suppression to its own member states. And now that they been hollowed out, there is nothing left to sustain Brussels.

This is the destination they have arrived at today. Brussels and its European Parliament are nearing the end of their ridiculously expensive and pointless pig-on-pork socialising destruction. Not only have the panjandrums no one left to rob, nowhere left to go, but they have bankrupted a whole continent. Surely, the robbing of the rich and giving to the poor is close to its end. The creditors and debtors have nothing material left — money in everyone’s balance sheet will be written off through a monetary and economic collapse. It is the process of it and the destination we must analyse.

The Eurozone’s banking system is a heartbeat from collapse, as will become evident in this article. There are two basic elements involved. At the bottom there are the commercial banks with rapidly escalating non-performing loans, a phrase which hides the truth, that they are irretrievable bad debts. At the top is the Eurozone-wide settlement system, TARGET2, which is increasingly used to hide the bad debts accumulating at national levels.

Before we look at the position of the commercial banks, in order to understand how toxic the Eurozone has become we will start by exposing the dangers hidden in the settlement system.

 

TARGET2 — chickens are coming home to roost

The imbalances between the ECB and the national central banks in the TARGET2 Eurozone settlement system are indicative of the current situation.

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Germany (light blue) is now “owed” €1.15 trillion, an amount that has escalated by 27% between January and September. At the same time, the greatest debtors, Italy, Spain and the ECB itself have increased their combined debts by €275bn to €1.3 trillion (before September’s additional deterioration for Spain and the ECB are reported — only figures up to August for them are currently available). But the most rapid deterioration for its size is in Greece’s negative balance, increasing by €45.6bn between January and August.

Is the Bundesbank worried by the increasing quantities of euros owed to it in a system that was always intended to roughly balance? Certainly. Will it publicly complain, or privately demand they be corrected? Almost certainly not. For statist systems such as the EU depend entirely on total obedience towards a common objective. All dissenters are punished, in this case by the waves of destruction that would be unleashed by any state refusing to continue to support the PIGS. TARGET2 is a devil’s pact which is in no one’s interest to break.

The imbalances are all guaranteed by the ECB. In theory, they shouldn’t exist. They partially reflect accumulating trade imbalances between member states without the balancing payment flows the other way. Additionally, imbalances arise when the ECB instructs a regional central bank to purchase bonds issued by its government and other local corporate entities. As the imbalances between national banks grew, the ECB has stopped paying for some of its bond purchases, leading to a TARGET2 deficit of €297bn at the ECB. The corresponding credits conceal the true scale of the deficits on the books of the PIGS national central banks. For example, to the extent of the ECB’s unpaid purchases of Italian debt, the Bank of Italy owes more to the other regional banks than the €546bn headline amount suggests.

 

Inside the workings of TARGET2

The way TARGET2 works, in theory anyway, is as follows. A German manufacturer sells goods to an Italian business. The Italian business pays by bank transfer drawn on its Italian bank via the Italian central bank through the Target2 system, crediting the German manufacturer’s German bank through Germany’s central bank.

The balance was restored by trade deficits, in Italy, for example, being offset by capital inflows as residents elsewhere in the eurozone bought Italian bonds, other investments in Italy and the tourist trade collected net cash revenues.  As can be seen from the chart, before 2008 this was generally true. Part of the problem is down to the failure of private sector investment flows to recycle trade-related payments.

Then there is the question of “capital flight”, which is not capital flight as such. The problem is not that residents in Italy and Spain are opening bank accounts in Germany and transferring their deposits from domestic banks. It is that the national central banks which are heavily exposed to potentially bad loans in their domestic economy know that their losses, if materialised in a general banking crisis, will end up being shared throughout the central bank system, according to their capital keys if they are transferred into the TARGET2 settlement system.

If one national central bank runs a Target2 deficit with the other central banks, it is almost certainly because it has loaned money on a net basis to its commercial banks to cover payment transfers, instead of progressing them through the settlement system. Those loans appear as an asset on the national central bank’s balance sheet, which is offset by a liability to the ECB’s Eurosystem through Target2. But under the rules, if something goes wrong with the TARGET2 system, the costs are shared out by the ECB on the pre-set capital key formula.

It is therefore in the interest of a national central bank to run a greater deficit in relation to its capital key by supporting the insolvent banks in its jurisdiction. The capital key relates to the national central banks’ equity ownership in the ECB, which for Germany, for example, is 26.38% of the euro-area national banks’ capital keys.[ii] If TARGET2 collapsed, the Bundesbank, to the extent the bad debts in the Eurosystem are shared, would lose the trillion plus euros owed to it by the other national central banks, and instead have to pay up to €400bn of the net losses, based on current imbalances.

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