Professor Sinn is back with a paper length version of his ideas about Target 2, co-authored with Timo Wollmershäuser.
I suspect people are a little bored with this now, so I’ll confine my comments to a couple of areas.
First, in relation to whether ECB operations have crowded out credit in Germany, Sinn now argues (page 19) that he has been “wildly misunderstood” and that he never meant to imply that the ECB was auctioning off fixed amounts of liquidity so that additional central bank money loaned to Irish banks would cause contracting credit in Germany. He appears now to be merely observing that because the Target 2 payments system facilitated movements of large amounts of money from Irish banks to German banks, then German bank demand for liquidity from the Bundesbank was bound to decline.
Well, who knows what Sinn did or did not understand about ECB operations when he penned his various pieces and really who cares? From my perspective, the key question is whether readers of Sinn’s articles (in particular, German readers) will have come away with the impression that ECB loans to Ireland were contracting credit in Germany. Interpret the following excerpts for yourself:
the credit to the Irish farmer comes from the Bundesbank at the expense of a similar credit provided to the German economy.
and
This is a forced capital export from Germany to Ireland
(Note of course, the transaction generating this supposed “forced capital export” in many cases was an Irish bank providing funds to a German bank to pay off a maturing bond!)
In relation to the idea that he mentioned the ECB auctioning off fixed amounts of liquidity, Sinn now claims (page 45) that there is a misunderstanding of what he said on this topic due to “an overly active blogger” (a reference to the perfectly admirable Olaf Storbeck of Handelsblatt) mistranslating something Sinn wrote in the Frankfurter Allgemeine Zeitung. And yet, here it is, in English, right in the middle in his VoxEU piece:
Moreover, strict crowding out is inevitable if the ECB controls the overall stock of central bank money in the Eurozone by way of sterilising interventions or auctioning off limited tenders.
I suppose Professor Sinn would point to the word “if” in the previous sentence and claim this was merely a hypothetical observation. But, it was his decision (and not Olaf Storbeck’s) to mention limited auction tenders as an argument for the idea that ECB operations will lead to crowding out of credit in Germany. Indeed, Sinn’s response has something of a Scooby-Doo feeling about it (“if it wasn’t for those meddling bloggers”!)
Second, in relation to his proposal that Target 2 balances be settled each year, as Fed districts settle their Fedwire balances, Sinn provides a non-response response to my point that Fed districts have no fiscal connection to the regions they serve and thus provide a poor comparison. The response that “the economic situation with 17 euro countries and 12 US districts is certainly comparable” is hardly an answer to the relevant question: What would happen if a Fed district bank did not have the resources to settle its Fedwire balance?
Sinn’s paper appears to concede that his VoxEU article’s call for annual settlement of Target 2 balances is unrealistic, as it would require a full year of GDP to be transferred by the Irish people. Implicitly, then, he appears to be moving back to his earlier proposal of setting annual limits.
As I noted before, this would effectively spell the end of a truly integrated Eurozone. No matter how many “euros” I appear to have in my Irish bank account, the ability to make a cheque payment to Germany from this account would depend on whether Ireland has reached its Target 2 limit. Why anyone would maintain a bank account in Ireland under such a system is beyond me.
As you might expect, the paper contains a number of other gems. Stuff like page 48’s “However, all debts need to be repaid or at least be serviced such that Ireland’s debt-to-GDP ratio, including its Target debt, returns to reasonable levels” is a particularly unhelpful mixing of a genuine sovereign debt problem with an imagined “Target debt” problem that would only exist if Sinn got its way.
Then there was my favourite. Page 16 tells us that the availability of loans from the ECB “saved the GIPS the need to take measures to recapitalise its banks.” And here’s me thinking we’ve forked over €50 billion and counting to make sure that our banks could repay the bond investors that loaned them funds for speculative property investment.
48 replies on “Sinn Blames Those Overly Active Bloggers”
@Karl
Your demolition of the Wagnerian dragon Fafner (ake HWS) is great – but will he read it?
I was inclined to dismiss this guy as a crank.
But look at who he thanks for “in-depth conversations:” Mario Draghi, Otmar Issing, Georg Milbradt, Herbert Schlesinger, Christian Thimann, Gertrude Tumpel-Gugerell, Jean-Claude Trichet and Martin Wolf.
To think that anybody took his nonsense seriously. Is it any wonder we are in such a mess!
And well done Karl Whelan, again.
Tip of the hat to Karl!
Wag of the finger to prof sinn!
Govt should be paying for these posts to be translated and published in the original offending paper!
😀
He either has a big mouth or small feet. Not content with one, he’s now attempting to stuff the other in.
“The Target liabilities of the GIPS countries (Greece, Ireland, Portugal and Spain) amounted to 314 billion euros in March 2011. They measure the additional central bank money that their corresponding National Central Banks (NCBs) have loaned in excess of the money needed to cover their domestic currency needs. This additional money was used by the GIPS to pay for a net inflow of goods and assets such as companies, stocks, government bonds or other banking claims.”
That’s the first paragraph and it is rubbish. If this was a blog post, I wouldn’t go any further.
Why is it rubbish? The amount of ELA (I can see no other NCB lending that could be relevant) is coincidental. ELA is provided to banks. Banks use it to repay bonds and deposits (deposits are, I believe the larger flow). Buiter is pretty clear that this is nothing to do with the ESCB http://www.nber.org/~wbuiter/ela.pdf . It is the banks that transfer funds through Target2
When he says “loaned in excess of their domestic currency needs” what on earth is he talking about?
He seems to have it totally arseways anyway. The initial money movement into the PIGS was what funded asset bubbles, imports, all that great stuff that gave us the bubble, allowed the Greeks to stop paying tax, and cushioned the damaging effects of free trade on Portugal. That money, given to banks in the form of deposits or bond purchases (whether senior bank bonds, sovereign bonds or covered bonds) travelled in through the pre-cursor of the Target2 system.
Unfortunately, it appears that when Target2 was implemented, the initial balance was zero… if it was not, then the net benefit to Germany of trade with the PIGS was 316 bn in the last ten years.
The rebalancing that is required, if one is required (which I don’t believe it is), is for Germany to spend 316 bn on stuff the PIGS sell.
@Karl Whelan
This guy needs to be continuously taken on – as you note, his pernicious influence on German public opinion due to his position in the ‘formerly prestigious’ iFo Institute. His puerile defence of misunderstood hermeneutics as a form of explanatics for being caught with his narrow roight wing zenophobic nationalistic trousers inside out around his ankles as he tries to p1ss against the wind on the hibernian serfs simply leaves his ideological argument further exposed as both empirically and theoretically flawed.
Does this guy actually bother researching what he writes on, or does he just sit at his desk all day typing random things.
To begin with, no-one’s buying tractors or anything else in Ireland because the banks aren’t lending anything. People don’t have the funds to buy €15,000 sites with planning permission, let alone a new tractor.
Secondly, did Prof. Sinn even bother to find out why so much money is being loaned from the ECB to Ireland? Did he realise it was because Irish depositors are taking their money and putting it into German and other European banks? Did that particular aspect of this financial ouroboros somehow slip his mind, or is he being somewhat disingenuous in his analysis?
I can’t find a single thing I can agree with in this article. I even disagree with Sinn’s changing of the PIGS acronym to GIPS. I felt PIGS was both appropriate and deserved, though a bit unfair to actual pigs, who have never threatened to bring down any currency to my knowledge.
From my perspective, the key question is whether readers of Sinn’s articles (in particular, German readers) will have come away with the impression that ECB loans to Ireland were contracting credit in Germany.
Well, from the conversations I had with friends in Germany I can confirm this to be the case. I find it rather disappointing to be honest.
Prof. Sinn’s presentations are followed closely by business leaders and policy makers, not only in Germany of course, and it is here where I am uncomfortable, knowing too well that such opinion filters through into the public sphere.
On June 18th Olaf pointed to this paper
http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2011-035.pdf
Then there was Gustav Horn’s and Fabian Lindner’s early response from May (in german).
Further and perhaps the most interesting aspect is EZB’s Juergen Stark direct involvement, and it would appear that Stark does not perceive Olaf as ‘overly’ active when he recommended his post on Target 2.
We all make errors, and I guess it is fair to say that in these murky waters, it is easy to get something wrong, even for well established and respected scholars, but now I am honestly past the point to think that this is an error of judgement, I consider it a rather deliberate interpretation and it adds to the distorted views of Germany’s role in Europe, and as such is publishing somewhat dangerously misleading views.
Taken all into account, I still stand to my early Lord of the Rings analogy, H.W. -Saruman – Sinn
Best
Georg
How do people like Sinn get taken seriously by the media?
I’m sorry to be difficult, but Professor Sinn is more right than wrong in his analysis if not his policy prescription.
This seems to have degenerated into “he’s being nasty about Ireland when we’re the ones who are suffering.”
That’s not the point. The Irish government did not put EUR50 billion into the banks because it didn’t have the cash. It put in bonds which the banks effectively could not sell. They therefore borrowed the money they needed from the ECB through the TARGET2 mechanism. It is ECB lending which has kept the Irish banks alive, a point which some other commentators on this site make whenever they seek to justify not burning bondholders. If you had not borrowed the money from the ECB, you wouldn’t need to worry about offending them.
Without this lending from the ECB there would have been no way to meet the payments demanded by German and other banks as capital outflow. That would have led to bankruptcy for Irish banks and big losses for foreign banks but Irish national debt would have been far lower.
In effect, a refusal to allow repo facilities on this scale would have protected the Irish people from the foolishness of their government in making the bank pledge.
You’re wrong to dismiss the word “if” as well but we don’t need to go into that.
Prof Sinn misunderstands the functioning of the “”Interdistrict Settlement Account.”
He claims:
“The rules for the Interdistrict Settlement Accounts demand from each Fed branch that they settle the mutually build-up interdistrict balances in April of each year. There is no joint responsibility with a common liability sharing rule as in Europe………
In the US, the Interdistrict Settlement Account (the US equivalent to the Target system) must be settled in April of every year with gold-backed securities or other marketable assets that bear the usual market rate of interest.”
This is plainly false, the April settlement is a simple bookkeeping that rebalances the monetary base according to “the ratio of each [district] Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31…..The settlement also equalizes [each district] Reserve Bank gold certificate holdings to Federal Reserve notes outstanding in each District.”
If the Eurosystem were to adopt such a procedure, then the Central Bank of Ireland balance sheet would be much smaller, proportional to its capital key, as risks are shared that way (just like in the US btw).
[…] posted at Karl Whelan’s blog: The Irish Economy Prof Sinn misunderstands the functioning of the “”Interdistrict Settlement […]
@Georg
+1
@David Blake
“They therefore borrowed the money they needed from the ECB through the TARGET2 mechanism.”
No they didn’t! That’s the point!
Target2 is a settlement system. It is an after the fact accounting mechanism. It prevents the need to transfer currency, bullion, etc. physically. It is, in effect, a giant multiple-entry book keeping system that is balanced each day.
The money was borrowed by agreement. If Mr. Sinn wants to complain, he should be complaining about the ECB board doing exception liquidity support, buying periphery bonds, buying covered bonds from German and Dutch banks and the sterilization of the same.
If you got a loan from Bank of Ireland (imagine if such a thing were possible just for supposing) and there was 10,000 euro credited to your current account, would you claim that the BoI computer system gave you a loan? No you wouldn’t. You would say that a lending manager in BoI gave you the loan.
@ All
The SFB paper deals with the point raised by David Blake at page 23. There is no validation of the thesis advanced by Sinn.
I would be in agreement with George Baumann. Facts do not really matter in the fight to the death going on within the German policy apparatus, of which Sinn is a part. I would qualify one side as the responsible European one, the other the irresponsible dogmatist one which seems to live in the hope that Greece will shoot itself in the foot by defaulting and both provide what they imagine to be the solution and carry the associated opprobrium.
To call the resulting compromise German policy position a high risk strategy would be an understatement cf. a recent note from Coutts (including the link to an earlier note).
http://www.coutts.com/news-and-insights/market-perspective/daily-themes/2011/24-june-2011/
The Governor of the Bank of England has now weighed into the debate making obvious the reality which Germany and the other creditor countries are refusing to confront, that of an insolvency rather than a liquidity crisis. The saving grace is that, while the argument goes on, the debts are being transferred from private to public ownership which makes a controlled explosion in state relations rather than a disastrous sudden one in the markets more likely. The handling of Icesave deposits provides a good example.
It seems we must wait a little longer to learn what precisely has been decided with regard to the amended EFSF and the final text of the ESM. What a way to run a railroad!
I’m not sure if this article was mentioned previously. Se the Bundesbank March 2011 Bulletin http://www.bundesbank.de/download/volkswirtschaft/monatsberichte/2011/201103mb_en.pdf for a description of how Target2 works. There is a chart showing the spectacular increase in TARGET2 claims, which the Bundesbank considers (reasonably in my mind) to be a net capital export from Germany.
The second chart, TARGET2 settlement balances in the Eurosystem, is also very interesting. It shows Germany at one end of the scale, and little Ireland, with not so little balances, at the other end.
As the Buba says, TARGET2 balances accumulated at the national central banks reflect in part how distribution in refinancing operations in the euro area has changed since 2007.
For an actual loss to be incurred, another central bank must default, presumably should the collateral it posts not reflect the full value of the collateralised refinancing operations. The Bundesbank expects any actual loss would be borne by the Eurosystem as a whole. So the Bundesbank large TARGET2 claims would not be an issue. That presumes the execution of current agreements.
A good understanding of the accounting identities and how they work is a preamble to any analysis, and interpretation (this Bundesbank paper in English just skims the subject). I’m not aware of much written in Ireland on this topic (little Ireland being the only eurozone member where English is spoken).
@ Karl
I read your earlier riposte. You are probably right in all your criticisms but the one area where you have indisputabley revealed our Teutonic Professor to be somewhat sartorially deficient is when he draws comparisons between the FED District Banks and the EZ.
These 12 FED districts do not even compose of collections of States, in some cases they include only parts of States. They are mere geographical branches of the FED which seemed suitable to the communications environment of 1913 when they were established. A District has absolutely no political or fiscal identity. A District 12 dollar is absolutely every bit a dollar as a District 1 dollar. There is no chance ever of District 12 dollars being devalued versus District 1 dollars. In the unlikely event that Californians moved all there dollars to New York, that would be no problem at all, the equivalent of Target 2 would be implemented between the Districts.
Now the individual sovereign nations of the EZ take the place of the 12 Fed districts. Target 2 is the absolutely necessary mechanism for a monetary union. There should be no difference between Irish Euros and German Euros. Unfortunately the citizenry have reached the position where they don’t trust this absolutely sine qua non of a monetary union. People have a vague or even very real fear that they might waken up to find their Irish Euros are Punts Nua. Accordingly there has been vast movements of Euros from the periphery to the centre and the Target 2 mechanism has had to be invoked big time. Target 2 didn’t cause these movements. Neither did fiscal delinquency nor trade imbalances. It is almost entirely due to the users of the common currency not believing that the currency always will be common.
This is much more insidious than a simple lack of trust in domestic banks. It also calls into question whether massive recapitalisation of Irish banks will actually address the problem because even after such recap the fear will remain that Irish Euros might not always be Euros. I see no sudden repatriation of Euros after these recaps.
Dare I suggest that the only way out is for the ECB to give a blanket guarantee to people’s Euros no matter where in the EZ they are localised? This is after all what they do for the Notes and Coin.
@JMC
Of course the CESifo receives a lot of press attention, but fwiw. perhaps another angle is even more interesting.
Apart from public press, CESifo rates number 20, one below the IMF, as the largest contributing member in ‘The Research Papers in Economics’ network, RePEc.
http://repec.org/
Another indicator that Karl’s concern expressed, whether readers of Sinn’s articles (in particular, German readers) will have come away with the impression that ECB loans to Ireland were contracting credit in Germany. , can be answered positively is the ranking of RePEc ranking of economists in Germany, here from May 2011.
http://www.cesifo-group.de/cesifo/newsletter/EconRankings-0511.htm
It is the most influential economic research Institute in Germany, but they equally are very active and influential on European policy consulting level, have products for the wider markets, and are well cited throughout Europe, and as such they do hold a special responsibility in my opinion.
It gives this target 2 discussion a special flavor, because for CESifo this clearly is a policy issue, and they are ‘working it’.
http://www.cesifo-group.de/portal/page/portal/ifoHome/B-politik/90spezial/Target
@Joseph Ryan,
seriously, CESifo is the heavy weight in economic research in Germany, and very high up in EU concerning influence on policy makers, I find it irresponsible what they are doing here, and in my view it pours oil in a fire of national sentiments already somewhat out of control hence contributing to a core political problem that is even greater than the financial ones, the European Identity crisis.
@Georg Baumann
Yes – does look as if they are ‘working it’. But a one-man-show …….. SINN led all the way ………….. short a few specialist tools in this area so must rely on likes of Karl Whelan, Michael Moore, William Buiter, Blind Biddy O’Nuff, other ‘overly active bloggers’ et al Troubling to see an Economics Research Institute peddling such retrograde petty nationalistic stuff – while the big picture awaits a resolution. I’m passing Sinn over to the psychologists – Fromm, Freud and Jung could throw a roight party in discussing Sinn’s motivational intent.
@ Ciarán O’Hagan
The Bundesbank contribution has been linked to on several occasions. In fact, it goes to the heart of the matter (as you quote it).
“For an actual loss to be incurred, another central bank must default, presumably should the collateral it posts not reflect the full value of the collateralised refinancing operations. The Bundesbank expects any actual loss would be borne by the Eurosystem as a whole”.
This is the nub of the issue which Sinn is getting at but seems unwilling to come out with. The capacity of the various central banks (read governments) to avoid difficulties varies enormously and this is also the fundamental weakness in both the EFSF and the future ESM.
Assuming that the Greek opposition passes the austerity measures and does not precipitate the denouement so obviously sought in certain quarters in Germany (as the proverb has it, if I am not quoting it incorrectly, Lieber ein Ende mit Schmerzen als Schmerzen ohne Ende, ‘better an ending with pain than pain without end’) the can-kicking will continue.
The member countries of the EZ will eventually have to look at the situation again and, as I have argued on this blog, come to a view as to the dividing line between the cost to be attributed to national responsibility and that to be borne collectively. The process of structural, taxation and wage reform must continue in parallel in the three countries affected in the meantime before a political resolution of the problem of attribution can be arrived at. There is no avoiding this game of chicken as our esteemed Taoiseach is finding out.
But it is an extraordinarily high risk German strategy. If something goes wrong, it remains to be seen if the view of Willem Buiter that we are not facing another Lehmans will prevail (because the debts – and the banks and institutions exposed to them – are of, as he describes them, of the plain vanilla variety and can be both identified and quantified).
Prof Sinn isn’t infallible like the rest of us but he and his institute does highlight some interesting issues at times.
What would indeed be a miracle in Ireland would be if an Irish academic opened a thread for discussion, when a compatriot academic made a fool of himself.
I would put a cross on the mantelpiece.
@David Blake
“You’re wrong to dismiss the word “if” as well but we don’t need to go into that”
I didn’t dismiss it. In fact I explicitly highlighted it. The point remains that it was Sinn himself (and not Olaf Storbeck) who raised the issue of fixed tender auctions.
And whatever point you’re making about the ECB and the Irish banks, the point remains that Sinn’s inclusion of Ireland in a list of countries that didn’t take measures to recapitalize banks is wildly incorrect.
@ Michael H
Amazing how Irish economists simultaneously can’t agree on anything and are also a cabal bound to agree with each other by a code of omertà.
Still, whatever the topic, I note your consistency in finding whatever it is to be further proof of the evilness of Irish academics.
No matter how many “euros” I appear to have in my Irish bank account, the ability to make a cheque payment to Germany from this account would depend on whether Ireland has reached its Target 2 limit. Why anyone would maintain a bank account in Ireland under such a system is beyond me.
Granted it’s not very relevant to this thread, but if I actually send a cheque drawn on an Irish bank to Germany, it will take an age to clear and there will be non-trivial bank charges. One of the obvious flaws in the Eurozone is the lack of a satisfactory clearing system. At least, that was my experience a few years ago, when I lived in France; a local bank account was a necessity. Paying bills from an Irish account would have landed me in the merde. Has anything changed?
Of course that has nothing much to do with Target 2, beyond the fact that the euro isn’t really a common currency in the fullest sense. The banking system isn’t properly unified.
Hi Karl,
excellent post, and many thanks for the kind words!
WRT to my alleged mistranslation of his thoughts: This is a bogus claim. I did not translate any of the English quotes I used in my blog post. All were taken from his “Stealth Bailout” article which was published on Vox.
I’ve written a reply to Sinn: http://olafstorbeck.com/2011/06/25/the-dirty-tricks-of-hans-werner-sinn/
Cheers
Olaf
@ All
The following post is carried over from the John McHale thread on the issue of the preferred creditor status of the ESM.
This Fionan Sheehan report in the Indo has to be the most interesting story that I have read in recent months, especially the following extract.
“Instead of a corporation tax hike, the French are now believed to be looking for a concession from the Irish government on the broad area of maintaining tight budgets.
Coalition sources indicated that options being explored include commitments from the Government not to go beyond budget allocations in areas of spending.
If money allocated for a specific area ran out before the end of the budgeted period, it would not be topped up.
The Government would also have to sign up to stringent budgetary restrictions.
The agreement would allow the French to say it had secured concessions from Ireland, while the Government could maintain it didn’t concede ground on corporation tax.”
http://www.independent.ie/business/irish/stalemate-broken-in-talks-on-bailout-cut-2804941.html
The question of why the French were choosing to pursue the “Gallic spat” always had a rather obvious answer. The new Irish government had to be disabused of any idea that Ireland would be allowed to take any soft options at the expense of the rest of the EZ. Indeed, the issue has been debated at length on this blog.
But one wonders if the reasoning may not go deeper and the change in the French position, or rather the revelation of its true motivation, may not be linked to the change made in the ESM with regard to preferred creditor status for the three countries presently “in a programme”.
Two Voxeu articles, one by Paul de Grauw and another by Paolo Manasse, provide a reminder of the background.
http://www.voxeu.org/index.php?q=node/6484
http://www.voxeu.org/index.php?q=node/6315
Is the change in the preferred creditor status a recognition of the flaws inherent in the very concept of the ESM and a means of building into it a form of planned obsolescence? In other words, is the underlying idea now no more than that of deterrence, with a view to using the instrument solely for the case of Greece and getting Ireland (and possibly Portugal) out of the quarantine ward before it comes into force? The state of health of the Irish economy and ensuring that the new government keeps its nose to the grindstone are two obvious key elements. Another is the message from Michale Noonan to “get shopping!”. After all, it is only the government that is broke, not the Irish people.
P.S. Stephen Collins asks in an article in today’s IT “who will be the next Mac Sharry?” A very pertinent question! We already have two leaders competing for the role of the Pied Piper of Hamelin.
Michael H,
show me an Irish academic who believes that deposit drains on Irish banks cause credit contraction in Germany and I will be happy to do the honours.
Sinn is damaging public policy debate with this specious nonsense. His material is replete with factual errors, and at points it becomes clear that he is outright mendacious. Given that he has namechecked both Draghi and Trichet, the Irish government should insist on a clarification from the ECB.
More on this topic can be found here:
http://olafstorbeck.com/2011/06/25/the-dirty-tricks-of-hans-werner-sinn/
If I understand it correctly, before the financial crisis all the money ended up in Germany (more correctly Germany, Luxenbourg, Netherlands and Finland) which then lent the money back out to the PIGS. After the crisis all the money ended up in Germany, which no longer lends it out to the PIGS. Instead it puts it on reserve with the Bundesbank/ECB, which then lends it out to the PIGS. Sinn wants the money to be lent out to Germans, so they can raise their productivity and hence their standard of living.
Well it seems that the German banks could have lent this money to Germans before the crisis, and can lend this money to Germans after the crisis, so what’s stopping them?
Also it seems that opposition to Sinn’s argument must be one of the first to have caused a united front between most commentators on this blog and the ECB. I guess you have to be spectacularly wrong for that to happen!
@hoganmahew
If I got a loan from the bank of Ireland and the bank of Ireland got the money from the ECB, I would recognise that it was the ECB which made the loan possible.
It’s unfortunate that this issue seems to have become so personal that people are talking past each other. If I’m guilty of that, I apologise.
Let me try to put my point another way. One of the issues frequently discussed on this site is whether imposing a haircut on bondholders would be right. A frequently cited (and powerful) argument is that this would be unwise. The reason that it would be unwise is that it might provoke the ECB to stop funding the Irish banks.
Now, the general tone of the anti-Sinn view is that the TARGET2 balances don’t represent a loan. But if they are not a loan, why are people afraid of being asked to pay them back?
Sinn’s comments on crowding out are certainly, at best, clumsy. But the tone of the attacks on him ignores the fact that the unlimited repo facility on which the Irish banking system depends is very exceptional. In the normal repo, things would be very different.
Ireland did not have the money to recapitalise the banks. It issued bonds which may or may not be repaid and which would not have helped the banks without the ECB TARGET2 balance.
It is as if in pre-Euro days, the Irish government had printed the money and kept the currency stable using massive intervention in the FX market with money borrowed from the Bundesbank. Of course the Bundesbank would not have agreed to lend that money. Clearly within the Euro there is a need for TARGET2 to meet the needs of flows. But when those flows come about through massive-issuance of government bonds being used as backing for repo operations to fund capital outflows there is a special situation.
I do find Karl Whelan’s position difficult to understand, given the usual high quality of his analysis. He seems to be saying (1) we haven’t borrowed the money and (2) it is totally unreasonable to ask us to pay it back in a year. I don’t see how these views can be reconciled.
@ David Blake.
Interesting take. I like the bit that Target 2 is about maintaining the Exchange Rate. This precisely describes its function. The Exchange Rate of course is immutable and so Target 2 is not causally maintaining the Exchange Rate, rather it is the other way round the fixed Exchange Rate is causing the Target 2 imbalances.
People think that Irish Euros are somehow different than German Euros. It was never meant to be like this. As I stated earlier this perception that indeed there are different currencies in the union is much deeper than a distrust of domestic banks and it will not be solved overnight by massively recapping the banks.
Back to causality. Irresponsible private lenders sustained the Greek trade imbalances and the Irish property bubble. So far as I am aware there were minimal Target 2 effects in those heady days. Target 2 was not the root of this mess although I suppose the perception that peripheries had endless access to cheap Euro credit had something to do with the downfall, that is a failing in the basic architecture of the common currency.
What has been happening in recent times is a complete collapse in confidence in holding Euros in periphery countries and the resulting massive Euro imbalances have had to be facilitated by Target 2. Target 2 is never causal, it is the final result of an ill conceived though well intentioned project.
The Euro will survive this. Mainly because its collapse is totally unthinkable.
@DOCM
I think there’s a very simple explanation for this – France was totally isolated and backed down. The facts are that everybody, from the IMF, EU Commission, ECB, Merkel etc made their position very clear on Ireland sticking to the plan – the French position on the need for fiscal discipline was no different to everybody else. What was different was that only the French were linking the interest rate cut with CT. The IMF, EU Commission, the ECB, 26 other EU countries and the US government thought this was a bad idea.
It remains to be seen what the extra budgetary provisions are, but given that Ireland has already signed up to the bailout and the enhanced SGP, which effectively means that the size of each year’s budget adjustments are already determined outside Ireland, they are probably fairly minor over and above what has already been agreed to. I think Noonan is pretty committed to sticking to the plan, so he may even welcome some extra constraints for his internal battles with the Labour Party. Noonan already supports a debt brake if I remember correctly.
Also I would suspect that having seen the success of the ECB with its “nuclear” option, Ireland threatened to veto support for the next Greek bailout unless it got the interest rate cut. How could voting to allow another country to have a more favourable interest rate than your own be in the national interest? Even Sarkozy could probably understand that. After that the job was just to find some face-saving measure for the French, and another Euro Plus Pact-type commitment fit the bill.
On the Sinn-saga: if an opponent blunders (as he has done on the crowding out of credit in the German economy) the correct response is to go in for the kill. Perhaps a working/occasional paper done by Irish (and other) economists jointly with the ECB, published in English and German on the ECB web site, would be a good idea. This paper could then act as the basis for a number of more layman-friendly articles in the German financial press. Jurgen Stark recently said that some academics (i.e. Sinn) are in danger of losing their reputations. Maybe it is possible to help that process along.
@David Blake
“If I got a loan from the bank of Ireland and the bank of Ireland got the money from the ECB, I would recognise that it was the ECB which made the loan possible.”
If you got a loan from BoI and BoI used deposit money to make that loan, would you say you got that loan from an individual depositor? What if it was a loan from multiple deposit accounts? What if it was borrowed interbank from a Chinese agricultural bank? Would you say you’d borrowed money from paddy-fields?
The source of the money to the bank and the issue of the loan are separate transactions. They may happen, in the case of repo in particular, so closely together that one could argue that the loan happens before the funding to back it, but they are still separate transactions.
“the TARGET2 balances don’t represent a loan. But if they are not a loan, why are people afraid of being asked to pay them back?”
Who’s afraid of paying them back? There isn’t anything to pay back. The German banks have a huge surplus. They need to return to lending this in the interbank market. This is the way a single market in financial services is supposed to work (see Bryan G’s summary of Mr. Storbeck’s post).
The problem is not that we have borrowed the money. It is that we have paid it back. That is what the imbalance is showing.
“when those flows come about through massive-issuance of government bonds being used as backing for repo operations to fund capital outflows there is a special situation.”
This is not what has happened, though. Deposits and bonds have been repaid to German banks, investment funds, depositors. The flow is from the PIGS to Germany. The Irish government has been shut out of the bond markets – it is IMF and ESM/EFSF money that is sustaining the deficit. The ELA that the ICB has issued is a debit on the eurosystem – it is being used to create a credit in the Bundesbank, likewise the ECB repo. Both sets of loans are backed by assets, with varying degrees of haircuts.
While the NAMA bonds, self-issued bonds and promissory notes might be considered ‘printing’, the rest is asset based.
@David Blake
PS I too apologise if you feel I’m talking past you or shouting at you. The points you raise are the key elements of Mr. Sinn’s argument, so they are worth talking about quite a lot!
@ David Blake
Both sides in this discussion can be right because they are often talking about different things. Sinn clearly misrepresents the functioning of the Target 2 system in a way that is obvious even to me as a non-expert but it is equally clear to me that the funding by the ECB of the peripheral countries is a loan and one that would not be granted in normal circumstances (defined as the capacity of the countries in question, and their banks, to fund themselves in a normal way). Which brings us back to the question of solvency.
William Keegan goes to the heart of the matter in today’s Observer.
“Why has Germany been the greatest economic gainer from the eurozone? The answer is partly that it possesses such a fundamentally strong economy, but also that other eurozone economies have been unable to devalue against it as its competitive position has improved while theirs has deteriorated.
For, although most of the recent economic discussion has been about budget deficits and the impact of the banking crisis, the eurozone crisis has essentially been an old-fashioned balance of payments crisis for many economies within the zone. In 2010, Germany ran a $185bn current balance of payments surplus – 5.6% of gross domestic product”.
http://www.guardian.co.uk/business/2011/jun/26/a-collapse-in-the-eurozone-be-careful-what-you-wish-for
We have been here before and the answer was, prior to the ERM, as far as I can recall, a revaluation of the Mark and when the ERM came into existence, the adjustment of parities or the widening of the fluctuations allowed (I forget which).
It is extraordinary that the mercantilist policies of Germany, apart from being little discussed, have not been recognised except in the most timid way. In the Euro+ Pact, for example, any requirement that there be an adaptation to long-standing German policies – such as the absence of a minimum wage – has been avoided.
Something has got to give!
@David Blake
The basic issue is that Werner-Sinn is proposing a system whereby the taxpayers of every Euro member have to fork out huge quantities of cash any time there’s a net money movement out of their domestic banks. As a recipe for financial instability, I don’t think this can be beaten.
The more I see of this, the more I think that the misprepresentation of the Target 2 system is deliberate.
Greek and indeed Irish depositors with funds in German of ‘strong’ EZ banks would hope to happily repatriate the funds in Euros post an exit from the euro accompanied by a devaluation.
I just wonder if this is a first step to saying, ‘hold a minute’, the ECB will not allow these deposits to be refunded in euros. They will be refunded in local currency, with the profit being used to offset the Target 2 balance at the ECB.
As other commenatators have pointed out, there is an agenda at play here. The truth and the facts will always be secondary in such circumstances.
@ David
“Now, the general tone of the anti-Sinn view is that the TARGET2 balances don’t represent a loan. But if they are not a loan, why are people afraid of being asked to pay them back?”
I’m afraid you are confusing all sorts of issues here.
Like the great Professor, you are confusing the role of a payments system (Target 2) with the ECB’s open market operations.
Target 2 balances, in and of themselves, are not loans. Asking for these “loans” to be “paid back” is in fact asking to place serious limits on the functions of intro-Euro-area payments system. And as I’ve noted repeatedly, it would effectively make a euro in an Irish bank a far riskier proposition than a euro in a German bank.
The key objection to annual settlement of Target 2 balances has to be that this would effectively be the end of the Eurosystem as a unified entity and, more importantly, the end of the euro as a standardised form of payment across the Euro area. I’d recommend reading pages 25 and 26 of this paper by Ulrich Bindseil (European Central Bank) and Philipp Johann König (TU Berlin)
http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2011-035.pdf
That the proposal also involves instant repayment of a full year of GDP from the Irish Central Bank is just an illustration of how unworkable this proposal would be.
So the phrase “Target 2 loans”, which originated with Sinn, is unhelpful in and I’d recommend the people not use it.
On the other hand, the ECB’s repo operations — which the change in Target 2 balances reflect — do provide loans to Irish banks. And if you want to adopt the position that the ECB should scale back its loans to Irish banks, then feel free to make that argument. But you can do so without reference to Target 2.
Furthermore, in making such an argument, you might want to factor in the potential negative consequences, including
(a) losses for the ECB when the banks are unable to source replacement funding and the ECB needs to take the underlying collateral
(b) Eurozone financial stability implications of the ECB pulling its loans from banks in one of the member states in an EU-IMF programme.
@ Desmond Brennan
Should the Irish officials not have asked for clarification of T. Geithners involvement as well?
I fail to see this happening, and I would not hold me breath on your very valid request either.
“The key objection to annual settlement of Target 2 balances has to be that this would effectively be the end of the Eurosystem as a unified entity”
How about securitizing assets of the peripheral NCBs annually, in an amount equal to TARGET liabilities, and assign that securitization to those NCBs with surplus TARGET balances, pro rata according to ECB capital shares?
Then annual settlement is a non-issue – roughly analogous to the Fed inter-district settlement process.
It’s just bookkeeping, but so is the whole financial system.
@ JKH
Just bookkeeping as you say, but it would put Sinn in his box as each year the Bundesbank’s Target 2 balance gets cancelled.
@Karl
I read the good Professors previous (“farmer and tractor”) article when it was first referred to in this site.
Despite spending time reading it at that time I only really learned two new things:
1)German exports (like UK exports) to Ireland are significant despite the size of our population.
2) Professor Sinn displayed a streak of diplomacy (reflecting future ambitions?) by writing “GIPS” rather than “PIGS”.
I am only a humble reader who occasionally posts comments but I am not sure I can spare the time it takes to absorb Professor Sinn`s thoughts other than to “read between the lines” .
Although ,as I was delighted to see that since he has an opinions about “overly active bloggers” ,I suppose it is only polite for this site to return the compliment by referring to him on (very rare) occasion.
Of course if I am wrong and Professor Sinn actually has influence on future policy direction in Europe ( an “image of a “pilot less ship”comes to mind) than we can deduce that an excellent site like this also has some influence.
Brian Woods II,
Indeed, cancelling the TARGET balances annually was the intended idea.
There’s another way of doing it that would be even be more analogous to the US system. To implement it, there would have to be a supra-national Euro bond of some sort whose payout was backed according to ECB capital shares. That would be the Euro correspondent to a US Treasury. Each year, the deficit NCBs would buy those bonds, and deliver them to the surplus NCBs in order to cancel TARGET claims. Having created more monetary base from the bond purchase, the deficit NCBs could also retire regular refinancing claims in the same amount.
This idea correlates somewhat with Professor Sinn’s reference to the bond analogy in a slightly different context in his paper. And both these things are consistent with Sinn’s further notion that the ESM will effectively provide a front door version of the current back door “stealth” transfer – to be implemented at a point in time expected to be just before the surplus NCBs run out of natural balance sheet room for the further expansion of their TARGET balances.
@ KW
This defensive exaggeration suggests that you are better at dishing out criticism than taking it.
I guess it’s evil for example to say journalists also tend to be much better at dishing out criticism than taking it.
Using the group as a defensive shield is common because the purpose is to deflect the argument.
Proponents of public service reform are anti-public servants; in the US, raise the issue of tax breaks for the rich and someone is likely to shout ‘class war’ and so on.
@ colm mccarthy
That is certainly a case of a mortal Sinn but we did have the example of possibly a lesser sin in a confusion about bank deposits.
To make an error is human and few have recanted on positions taken during bubble times.
You are among the few who doesn’t have to declare past positions now inoperative.
Gillian Tett wrote in the FT last week of recently meeting Greenspan who claims “gross misrepresentation” about his 2008 admission of a “flaw” in his thinking.
He did accept he had got a number of key things wrong including on subprime and how far house prices would fall.
Dr.Tett who has been an anthropologist wrote: “I respect his formidable intellect and spirit of inquiry – and the fact that he has admitted to a few flaws. It is more than most have done. As such it is a challenge to us all.”
A reader commented: ‘Economics presents a puzzle. Almost all the nobel laureates (or Bank Medal winners, to be more nearly accurate) are from the US, followed by UK. The economies that are doing well such as Germany, China and Korea seem to lack any economists “worth the name”, and definitely have NOT produced “maestros” such as Mr Greenspan.’
@Karl – I have read some of Sinn’s recent ‘contribiutions’ – those in German and in English. My interpretation of what he wrote caused me to take the trouble to have a look at the Bundebank website (I am not sure that he did though!).
@Michael Hennigan. Almost all the nobel laureates …. There are some exceptions (perhaps more than you think) – Reinhard Selten (German), Trygve Haavelmo (Norwgian), Maurice Allais (French), Franco Modigliani (Italian)….
Dear Professor Whelan,
after reading Sinn’s lengthy paper which gives pretty clear evidence on how and to what extent target 2 replaced private capital flows to the GIPS, it is beyond me how you can believe that “Target 2 balances, in and of themselves, are not loans.” Maybe not in your Central Bank parlance which tries to circumvent the simple truth: Without target, the GIPS could not have continued to run such large deficits and the Eurosystem (i.e. the taxpayer) would not be on the hook for those.
But I should not worry because the truly “great professor” around here is certainly you…
I could not resist commenting. Well written!
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