See the following contribution here from Hans-Werner Sinn. It is certainly original but frankly alarmist. It focuses on the fact that National Central Banks within the euro system are lending bilaterally to each other though without changing the monetary base as a whole. Sinn jumps from there to draw apparently worrying conclusions: that these are “forced capital exports”; that they are the counterparty to current account deficits and that “the PIGS would have had a hard time finding the money to pay for their net imports”.
There is not a scintilla of evidence that the private non-bank sector in the PIGS has lost access to normal European financial markets. If the Bundesbank lends to the Central Bank of Ireland, it does not, in any sense, expand the availability of credit to the private non-bank sector in Ireland. Similarly, German households and firms do not suffer a credit contraction. This is, of course, because there is free movement of capital within the single currency area.
The second non-sequitur in Sinn’s article is the association of accumulated current account deficits in the PIGS with these bilateral loans. Ireland has, of course, a current account surplus so the point is completely irrelevant to at least one of the PIGS. Sinn notes that Italy has not availed of these inter NCB loans, despite its current account deficit, but mistakenly attributes this to virtuous policy on the part of the Italian authorities! It is of course because Italy so far has not yet suffered from a banking or sovereign debt crisis. And for no other reason.
My suspicion is that Target 2 credit is ultimately guaranteed by the ECB: that the Bundesbank loans to the Central Bank of Ireland should be considered as contingent items on the ECB balance sheet. In short, that Target 2 credit is simply a mechanism for implementing ECB policy. But I remain to be corrected on this.