Via Olaf Storbeck, I found an excellent post on the Target-2-System by Rebeleconomist and on Hans-Werner Sinn’s argument that the ECB is conduction a Stealth-Bailout using its Target-2 payment system. I advice reading it, but take some time. It’s very comprehensive.
I agree in almost every point, just – as I pointed here out previously – I don’t see Target-2 as a stealth bailout. The bailout is caused by the relaxation of the collateral standards, not Target-2. Actually we are lucky that Target-2 exists, as it adds a lot transparency to the secretive business of central banks. We wouldn’t have any hard data points on the payment imbalances if the ECBS wouldn’t be split into many national banks. If the Eurosystem would have a single central bank, these imbalances would be well hidden inside some internal portfolios.
Rebeleconomist points out that we have a local bias of bond holdings. A point that I agree and that adds significantly to the systemic risk in the endangered countries and is yet another point against bailouts of banks. Bailing them actually worsens the value of their assets if it leads doubt of the creditworthiness of the bailing country.
One point I missed in the discussion so far, is the fact that the standards of acceptable collateral are partly still up to discretion of the accepting national banks (PDF, page 51):
Minimum size: At the time of submission for use as collateral (mobilisation) by the counterparty, the credit claim must meet a minimum size threshold. In an interim period (1 January 2007 to 31 December 2011), each national central bank may apply a minimum size of its choice for domestic credit claims. For cross-border use, a common minimum threshold of EUR 500 000 is applicable in the interim period. As from 1 January 2012 a common minimum threshold of EUR 500 000 will be applicable to all credit claims throughout the euro area.
In practice this means that some collateral may be eligible in some countries only. Banks might find a way to arbitrage on that. E.g. a German bank could provide it’s Irish branch with collateral that is eligible in Irland, but not in Germany. The Irish branch, in turn, could post it as collateral to get credit from the Irish national bank and return the money to its German headquarters. This would lead to a negative Target-2 balance of Ireland and a positive for Germany. However, this wouldn’t be caused by money Ireland received by the ECBS. It is a direct result of the differences in the collateral accepted. Note: I’m not saying these kind of transaction are actually taking place. I have no information on this. However, if it’s easy and banks benefit from it, than I wouldn’t see it as far fetched.