Greece, QE and the Target balances

The Target balances proved to be a reliable crisis barometer in the course of the euro crisis. They allow us to measure the cross-border capital flows between central banks within the eurozone. When things are running "as normal", they fluctuate around the zero mark because outflows and inflows always balance each other out when the financial market is in good working order – the purchase of foreign goods (capital outflow), for example, is countered by the granting of a loan from abroad (capital inflow), or the export of goods (capital inflow) prompts corresponding investment abroad (capital outflow).

This was not the case during the euro crisis. Private capital flows dried up and were replaced by public funds in the form of bilateral or multilateral aid provided by the EMU states – or in the form of ECB funds: the unlimited supply of liquidity to banks that was introduced in the course of the crisis meant that banks no longer had to turn to the capital market (or deposits) for refinancing, but had direct access to the central bank printing presses. This money was also used on a large scale to pay off foreign debt or finance transfers abroad – shifting capital. In other words: capital outflows were no longer countered by corresponding (private) inflows from abroad, but rather "only" by central bank funds; as a result, any offsetting took place within the Eurosystem and resulted in mounting imbalances between the central banks, the Target balances. On the one hand, there are the liabilities of the central banks in the crisis-ridden countries, which have been hit by massive capital outflows, while on the other there are the receivables of the other central banks, first and foremost the Bundesbank, which have seen just as sizeable inflows.

Download PDF (1006 kb)