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October 26, 2011 10:49 AM EDT
The Eurozone banking system has been operating a “stealth bailout” since 2007, according to Hans-Werner Sinn, professor at the University of Munich and President of the Ifo Institute.
This “stealth bailout” takes advantage of the Trans-European Automated Real-time Gross Settlement Express Transfer System (Target).
From 1999 to 2006, Target was simply a clearing and settlement mechanism for money transfers among Eurozone central banks. The Target balances mostly fluctuated around zero because the credits and deficits were quickly offset with public and private capital flows.
Starting from 2007, however, Target balances ballooned; some Eurozone members ran large Target deficits while others ran large Target credits.
The Target credits are interest-bearing claims owed by Target deficits; Sinn likened the Target deficits to short-term eurobonds.
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There is also a money-printing characteristic to this exercise because the Target deficit countries simply print the money and take on interest-bearing debts to the ECB, which then transfers them to Target credit countries.
Using Target, the central banks of Eurozone members like Germany have been “lending” to the central banks and banking systems of members like Greece.
Writing in a VOX EU commentary in June 2011, Sinn said at the end of 2010, the Target claims of the German Bundesbank rose to 326 billion euros while the combined Target deficits of Greece, Ireland, Portugal, and Spain stood at 344 billion euros.
By August 2011, Italy had come to the forefront of this Target “stealth bailout.”
In August, Italian yields soared (chart below from Bloomberg).
In response, Italian Prime Minister Silvio Berlusconi introduced an austerity package and the European Central Bank (ECB) “directed the central banks of all Eurozone members to buy huge quantities of Italian government bonds,” wrote Sinn in a Project Syndicate commentary.
These purchases reached closed to 90 billion euros in the period from August to October, according to Sinn’s estimates.
Perhaps more importantly, Italy also took on 40 billion euros in Target deficits in August and roughly 50 billion euros in Target deficits in September. Meanwhile, the Bundesbank’s credit increased by 59 billion euros in September.
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