One of the key underlying reason behind Euro Zone debt crisis of 2011/12 has been TARGET 2 imbalances. And current level shows the problem persists and after initial adjustments the imbalance is continually rising.
TARGET 2 is an automated payment system in Euro Zone, which has been called by some as flawed, while other embrace it as backbone of monetary union.
Under the system, if a Spanish Merchant buys from Germany, It assigns a debit balance to Bank of Spain, while crediting the Bundesbank. Such credit accumulation rose to such levels in 2011, it was evident that many countries will not be able to clear out their balances with creditor countries, Germany being the largest, hence the bailouts.
At the peak of 2011 crisis, German credit to debtor countries like Greece, Spain, and Italy rose to €700 billion, while Spain in August 2012 had a debit of €428 billion. After the recognition of the crisis and market turmoil, several Euro Zone debtor economies gone through significant reforms which saw German TARGET 2 credit balance drop to as €467 billion, by October 2014. But since then it has deteriorated again.
With European Central Bank (ECB), introducing stimulus, situation has gone worse, probably due to countries’ reluctance to implement reforms.
Once again according to latest data for February, German credit to Target 2 reached €605 billion, while Spain and Italy accounts for more than €520 billion in debit.
Everyone including ECB, seems to be speaking reforms while we are going back to the depths again.
The material has been provided by InstaForex Company – www.instaforex.com