Professor Sinn Doubles Down

I know this is getting silly now and everyone knows what’s going on with the Target 2 debate. Still, it’s entertaining to see Professor Sinn doubling down on his false claims about the operation of the Eurosystem.

By the end of 2010, ECB loans, which originated primarily from Germany’s Bundesbank, amounted to €340 billion.

Em, no. I don’t know how to explain this any better than here. But, like I say, really, honestly, no.

But, he’s on a roll now is Professor Sinn, so now we get a new nonsensical talking point:

If this continues for two more years as it has for the past three, the stock of refinancing loans in Germany will disappear altogether.

Indeed, Deutsche Bank has already stopped participating in refinancing operations. If German banks drop out of the refinancing business, the European Central Bank will lose the direct control over the German economy that it used to have via its interest-rate policy. The main refinancing rate would then only be the rate at which the peripheral EU countries draw ECB money for purchases in the center of Europe, which ultimately would be the source of all the money circulating in the euro area.

I literally laughed out loud when I read this. So Deutsche Bank don’t borrow from the ECB? Who cares? There have always been banks with surplus liquidity and banks that are short of liquidity. That’s why interbank money markets exist.

The fact that the ECB stands willing to make unlimited amounts of short-term loans to all Euro area banks at 1.25% is clearly the key influence on short-term rates throughout the Euro area.  Deutsche Bank may not be borrowing from the ECB but they certainly won’t be able to lend their funds out on a short-term basis at rates that are much higher than the ECB’s.

So ECB rates are clearly setting German short-term interest rates just as they set them elsewhere in the Euro area. (Note also the resemblance between ECB rates and short-term German government bond yields.)

So another scary sounding but ultimately baseless claim from Professor Sinn.

Sinn Blames Those Overly Active Bloggers

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.


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.

Germany a Huge Beneficiary from ECB Operations

One thought that I should have put in my, em, original Sinn post is the following.

Sinn and others believe that the Target 2 balances show that ECB operations have created a big risk for the German taxpayer, channelling lots of funds from Germany to Ireland. In fact, the truth is exactly the opposite.

The big change in Target 2 balances in recent years shows that German banks were huge beneficiaries of ECB operations. Without the intervention of the ECB, there is no way that the Irish banks or the government that backed them would have been able to pay back the huge amounts they owed German banks.

So the ECB operations allowed the German banks to turn hugely risky loans to Irish banks into completely safe deposits with the Bundesbank (the Bundesbank’s Target 2 balances are the mirror image of these deposits). Now, of course, Germany will share 28% of the credit risk stemming from these operations. But the rest of the Eurosystem has taken on 72% of the risk of operations that have hugely benefited German banks and the taxpayers that would have had to recapitalise them in the absence of the ECB operations.

Professor Sinn Misses the Target

I’ve written a post at the IIEA blog commenting on Hans Werner Sinn’s recent columns on the operation of the Eurosystem. Sinn has made some seriously incorrect claims and followed them up with dangerous policy recommendations. These columns have been cited approvingly by Martin Wolf, Paul Krugman and Felix Salmon over the past week.

Felix, however, has now read this post by Olaf Storbeck of Handelsblatt and doesn’t seem sure who is correct on these issues: He’s looking for “a central-banking wonk out there who fancies adjudicating this dispute”.

Well, with 11 years experience working in central banks, I suspect I meet the job requirements. I wrote my post before seeing Storbeck’s but hopefully my arguments back his up to help counter Professor Sinn’s somewhat wilder claims.