German central bank exposed to Greek exit

Tim Wallace
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BUNDESBANK claims on the Eurosystem soared in the past six months as investors pulled cash out of weak economies and poured it into Germany, new data has revealed, leaving the central bank – and so German taxpayers – heavily exposed to the weaker economies.

The German central bank’s exposure to the Target2 payments system stood at €698.6bn (£565.6bn) at the end of May, up from €495.2bn six months ago.

The exposure arises through inter-bank transfers of cash flowing into Germany, which leaves the Bundesbank with claims against the European Central Bank (ECB), and the ECB with claims on other central banks, and from the ECB pumping liquidity into banks.

If the Eurozone broke up, that could leave the German bank out of pocket, as the leaving countries may not honour their debts to the ECB.

To cover that cost, “the German government could issue debt to recapitalise the ECB,” said Simon Ward from Henderson, “or the ECB could lend the money to recapitalise the system, resulting in higher inflation. Either way, the German taxpayer loses out.”

However, ECB boss Mario Draghi has denied the exposures are a problem, as the ECB takes collateral in exchange for providing liquidity.