The Target claims on the Eurosystem held by the German Bundesbank jumped by 54 bln euros in January, reaching 515 bln euros. This is one of the largest increase since the onset of the financial and euro crises; only in September 2011 and March 2012 were the upsurges higher, with 59 bln and 69 bln euros, respectively.
“Behind this is most likely a massive capital flight from Greece”, said Ifo President Hans-Werner Sinn. Foreign investors and well-heeled Greeks appear to have whisked their capital to safe havens abroad, spooked by the increased insecurity regarding Greece’s solvency and its permanence in the Eurozone resulting from the outcome of the country’s latest election.
Interestingly, the Italian Target balance improved by 44 bln euros in January. This suggests a capital flight also towards Italy, although during the second half of 2014 massive capital exports from Italy to the rest of the Eurozone had occurred.
“In order to stay in business, the Greek banks affected by capital withdrawals turn to refinancing credit from their national central bank to obtain liquidity. Without this provision of liquidity, the capital flight would meet an abrupt end when the banks fall into insolvency”, said Sinn.
In this respect, he called attention to the replacement of the ordinary refinancing credit agreed yesterday, which had been drawn to excess, by emergency loans amounting to 60 bln euros. The freshly printed money is transferred through the Eurosystem’s Target payments settlement system to, amongst others, German banks, increasing in the process the volume of Target claims held by the German Bundesbank.
“The help provided by the ECB makes it possible for well-heeled Greeks and foreign investors to take their capital out of the country. This process is similar to bankruptcy delay in private law”, he added.
Given that it is not the duty of the European taxpayers to help foreign and Greek investors to bring their capital out of the country, the financing provided by the ECB should be severely restricted. This would force Greece to institute capital controls to rescue its banks. Such a measure was applied in Cyprus, albeit one year too late, in spring 2013. This delay made it possible for the Cypriot central bank in 2012 to draw fully half of GDP worth of funds from the printing press in order to finance the flight of foreign and domestic capital. The ECB should not repeat that mistake.
