Tangled and off target
And that's not the end of the European Central Bank's liabilities. There's also something called the Target2 Balance. (Target stands for Trans-European Automated Real-Time Gross Settlement Express Transfer System. Apparently the "s" in "settlement" is silent.) Target2 handles payments among banks in the eurozone and imbalances among eurozone members.
Membership in Target2 is mandatory for countries in the eurozone. Membership is open to European Union members that don't use the euro. Six non-eurozone central banks use Target2.
On one level, Target2 is a settlement system. On this level, the system works like this: European banks maintain accounts with their national central banks. When, say, a Spanish importer places an order with a German exporter and asks its bank to pay that exporter, the importer's Spanish bank transfers money to the German bank account of the exporter. The Target2 system debits the Spanish bank's account at the Spanish central bank, the Banco de España, and credits the receiving German bank at Germany's central bank, the Bundesbank. The Spanish and German companies settle their credits and debits with their respective banks, which then settle with their respective national central banks. The two central banks settle their accounts, not by transferring actual assets (cash, for instance) but through liabilities and credits in the Target2 system. The Banco de España winds up with a liability and the Bundesbank with a credit.
But on another level, Target2 is an automatic funding system designed to cover trade imbalances among eurozone members. If a country -- let's say Spain again -- imports more than it exports, it winds up with a big, and growing, liability in the Target2 system. But doesn't have to transfer cash or other assets to the Bundesbank to settle those liabilities. It, in essence, winds up owing the Target2 system, which has, in turn, created a liability that is ultimately due to the Bundesbank, but that in the short term is actually funded by the Target2 system.
I think you can guess what has happened in recent years to Target2 liabilities and credits as the eurozone's weaker economies lost competitiveness and imported much more than they exported to Europe's stronger economies. The Target2 liabilities for the eurozone's peripheral economies, including Greece, Italy, Spain, Portugal and Ireland, climbed by 150 billion euros in April to 770 billion euros. I don't have exactly comparable figures for the credits run up in the Target2 system by the eurozone's stronger exporters, but in February the Bundesbank showed a positive credit balance of 576 billion euros.
Trust is the tipping point
There's nothing magical about any of these numbers. There's no reason that a 1.9 trillion euro balance sheet -- the size of the European Central Bank balance sheet a year ago -- should be economically viable and a 3 trillion euro balance sheet shouldn't be, or that a 620 billion euro Target2 liability should be supportable and a 770 billion euro liability shouldn't be. So why panic now?
In the end, it comes down to trust.
If those Byzantine mercenaries had been willing to accept the debased solidus in 1050 as good money, the fact that it was only 10% gold wouldn't have mattered. Likewise, if the national central banks of Europe are willing to backstop the European Central Bank and, more importantly, if everybody in the financial markets is willing to trust that willingness, the fact that the European Central Bank has just 6.5 billion euros in capital becomes irrelevant. If banks and everybody in the financial markets believe that the Bundesbank and other Target2 creditors are willing to keep letting other central banks run up their liabilities, then the Target2 system is as good as gold. And the euro is solid.
But it works only if the trust in the system is there.
And it's here that the leaders of the eurozone have done real damage to their "money" in the way that they've handled this crisis.
More from MoneyShow.com:
VIDEO ON MSN MONEY
The USA dollar was a proposed form of currency, given to Congress by a couple bankers, when there were less than 20 people in the chamber at the time, that would give said bankers control over the US currency in the early 1900s... The paper costs approximately 7 cents to make, regardless of the number that's printed on it. It is no longer backed by gold because there is not enough gold to back it. It's value decreases with every passing year as more and more of it is printed before even a tenth of that which is printed has been cycled it out (ie, no equal exchange is taking place now).
My friends this is what happens when you let banks control your money. If you have gold, sell 10% of it as needed, but save up the rest. Because the economy is going to collapse very soon. Either President Obama, or President-Hopeful Romney will help this along by continuing the asinine approach of "Spend what doesn't exist." Ron Paul was right 30 years ago and he's right now. It's sad you'd rather elect a picture-esque fool instead of a "been there done that" old geezer.
go back to silver or gold backed notes.
Trust means expecting your government (or it's corrupted central banks) won't double the money supply almost overnight to pay for bloated government programs and pet projects of the politicians that the government should never have started or expanded to unreasonable scope.
In America we should be seeing massive inflation except that the Euro and other currencies were also massively devalued at the same time. This is why gold and other precious metals went through the roof while the Dollar maintained or improved its value against other currencies.
The Fed claims not to profit on the money it issues to the US government, but that is a bunch of bunk because what they mean is the owners take out as salaries all the profit and salaries are an expanse. The Fed is the largest financial parasite the World has ever known.
The FACT that the politicians have ignored their Constitutionally imposed DUTY to "Coin Money and regulate the value thereof" is the problem in the US! Our "monetary policy" would be solid if they had adhered to their Constitutional Duty instead of selling out (un-Constitutionally) to the banking cartels.
Our economy would have NEVER suffered the issues we have over the past 100 years if we had kept to the Constitutionally sound monetary principles the founders set out. Instead, we live in a world were there is NO financial stability because we cannot keep from reaching back into the well, The Private Corporation Central Bank - The Federal Reserve.
All the "Fed" and the European Central Banks are interested in is controlling the people and siphoning off the wealth of the people into the hands of the bankers. And our politicians have been willing accomplices.
The incredibly naive and misguided notion of "it could never happen here" will ensure it most certainly will. The vast majority will never see it coming, much less prepare. Now would be a really, really good time to divest oneself of dollar-denominated equities, and buy hard commodities, food storage staples, and precious metals. It's not the end of the world per se, but it will seem like it to those who don't take steps now.
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.