Tuesday, December 20, 2011

Short View: Potential bill for eurozone break-up

Financial Times
December 20, 2011

For an idea of what’s happening within Europe’s banking system - and the havoc eurozone disintegration could wreak - it is useful to go straight to its technical heart.

That would be Target2, Europe’s electronic payment system platform. It’s the eurozone’s financial plumbing and it settles over €2 trillion of payments every day.

Money sent from a German bank to a Greek bank, for instance, would travel the Target2 pipes to eventually be processed by national central banks. In this case, the Greek central bank would wind up holding a credit claim against the Bundesbank.

In normal times these claims would eventually even out. However, in the current crisis, the claims on countries like Germany have been racking up sharply as banks in peripheral eurozone countries including Greece and Ireland, unable to obtain finance in normal interbank markets, rely more and more on the European Central Bank for funding.


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