Money parked at the ECB at a negative rate of 0.3% hit a new high at the beginning of 2016.


Above chart from Statista.

Possible Explanations

  1. Fear of losses elsewhere

  2. No demand for loans

  3. No creditworthy borrowers

  4. Capital impairment at banks

  5. Failure of ECB policy

To encourage more lending, ECB president Mario Draghi cut the deposit rate for money parked at the ECB from -0.2% to -0.3% on December 3.

Clearly that did not work.

Let's now take a good look at Target2 imbalances, an excellent measure of capital flight from eurozone countries to other eurozone countries.

Target2 Imbalances in Billions of Euros

Country Symbol Target2 BalanceComment
SpainES-241.8Worst Negative Since 2012
ItalyIT-229.6Worst Negative Ever
GreeceGR-97.3Least Negative Since 2015 Q1
ECBECB-73.8Worst Negative Ever
FranceFR-73.5Worst Negative Since 2011
GermanyDE592.5Highest Since 2012
LuxembourgLU140.4Highest Ever
NetherlandsNL49.4Highest Since September 2015
FinlandFI31.8Highest Since August 2015
Cyprus CY2.4Second Highest Ever

European Country Codes

Country Codes

The above from Eurostat Country Codes.

Lack of Trust

Target2 is a measure of capital flight between eurozone countries. For example: A depositor in a Greek, Spanish, or Italian bank does not trust their bank so the depositor opens up a new account and transfers the balance to a bank in Germany, the Netherlands, or Luxembourg instead.

The recipient banks then park the money at the ECB at negative interest rates instead of buying Greek, Spanish, or Italian bonds.

Europe Fears Bail-Ins

Stepping back a bit, here's a key question: What caused the depositors to flee their banks in the first place?

The answer is fear of bail-ins, confiscations, capital controls, and bank failures like we have seen in Greece and Cyprus.

Recent examples include Portugal and Italy.

No Demand For Some Italian Bonds

Reuters reports Worried Italians Seek to Sell Out of Bank Bonds

Dec 11 Italians rushed to try to sell their bank bonds on Friday after taking fright at losses imposed on investors in four small lenders which had to be rescued last month.

Italy rescued Banca Marche, Banca Etruria, CariChieti and CariFe at the end of November under new European Union rules that shift losses to investors when a bank runs into trouble, moving the burden from taxpayers.

Some 130,000 shareholders and holders of 790 million euros ($864 million) in junior debt saw the value of their investments wiped out. It was the first time since the 1930s that bondholders suffered losses in a banking crisis. The suicide of a pensioner who lost money in the rescue has added to the outcry.

"People in Italy are rushing to sell subordinated bank bonds," said Giuseppe Sersale, a fund manager at Anthilia Capital. "Retail investors scared by the protests triggered by the rescue of the four banks are trying to sell, but there is no demand for them."

Dark Clouds Gather

Fears grow every day. And why shouldn't they?

Pater Tenebrarum at the Acting Man blog writes The EU Bail-In Directive: Dark Clouds are Gathering

In the article, Tenebrarum discusses forced bail-ins, noting two recent cases, one in Austria and one in Portugal.

In the case of Portugal, five bonds were moved from the BES "good bank" to the "bad bank" overnight wiping out everyone holding those bonds when the ECB suddenly discovered a financial hole in a bank thought to have been bailed out in 2014.

The bail-in mechanism is not the problem.

Tenebrarum writes (and I agree) ...

"In principle, the BRRD, or 'bail-in directive' as it is also known, is quite a good idea. The fact that lending money to fractionally reserved banks or even merely depositing it with them, involves risks needed to be firmly reestablished. One simply cannot expect that banks and their creditors will be bailed out by taxpayers at every opportunity. By arbitrarily meting out unequal treatment to similar classes of creditors, they are unwittingly hastening this process of recognition."

Bail-in Jitters

These bail-ins are causing jitters. Can you trust Spanish banks? Italian banks? French banks? Greek banks?

Depositors increasingly say no. And the recipient banks in Germany, Netherlands etc, don't want to risk bonds in those countries when the deposits are transferred.

Target2 imbalances rise nearly every month as a result.

Your Choice

Tenebrarum concludes with few quotes by Ludwig von Mises, which go to the heart of matter. This one says it best.

“Sorry boys and girls, you will have to choose. You can either have capitalism, freedom, prosperity and personal responsibility, or you can have socialism, tyranny, poverty and ‘security’. You cannot have both.”

Are German Banks Safe?

Here's an important question I leave you with: Do you think German banks are safe?

If so, you are badly mistaken. Think about Target2 for a second: If Spain, Italy, Greece, or any country leaves the eurozone, someone will have to eat those Target2 imbalances.

How would the ECB would allocate those losses?

Taxpayers, depositors, or bondholders will be bailed-in directly. Alternatively, the ECB will violate the Maastricht treaty and print the money to cover the losses. In that case, the euro will take a hit.

Nothing in Europe is safe!

This material is based upon information that Sitka Pacific Capital Management considers reliable and endeavors to keep current, Sitka Pacific Capital Management does not assure that this material is accurate, current or complete, and it should not be relied upon as such.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD drops below 1.1300 for the first time in two weeks

EUR/USD remains under bearish pressure in the American session on Monday and trades at its lowest level in two weeks slightly below 1.1300. US Markit Manufacturing and Services PMIs missed market expectations by a wide margin in early January. The S&P 500 Index is down nearly 2% after the opening bell.


GBP/USD extends daily slide toward 1.3450

GBP/USD continues to stretch lower toward mid-1.3400s on Monday as the mood continues to sour. Wall Street's main indexes are down between 1.7% and 2.1% after the disappointing PMI data from the US.


Gold declines toward $1,830 despite falling US bond yields

Gold climbed above $1,840 during the European trading hours but erased its daily gains to turn flat on the day at around $1,830. The benchmark 10-year US T-bond yield is down more than 2% on Monday as safe-haven flows continue to dominate the financial markets. 

Gold News

Crypto carnage continues to unfold

Bitcoin price has witnessed a massive crash over the past week, undoing the gains seen since July 25. Ethereum, Ripple and other altcoins have followed suit, experiencing an even worse crash. 

Read more

Nvidia extends losses after Bitcoin’s overnight flash crash

NVDA investors are getting used to seeing the colour red after a year in 2021 when all they saw was green. On Friday, shares of NVDA fell by 3.21% and closed the final trading day of the week at $223.74.

Read more