_ Dr. Hendrik Hagedorn. Berlin, 22. September 2023.
Much has been written in recent months about the threat of insolvency of the Deutsche Bundesbank.[1] The danger is much less than some have claimed. The reason for this is, among other things, the Target claims that are currently saving the Bundesbank and even the German commercial banks.
It took a while for the press to pick up on the report of the Federal Audit Office, which spoke of the risk of losses at the Deutsche Bundesbank in 2023, among other things.[2] But then the possible insolvency was suddenly on everyone’s lips. Even the foreign press reported.[3] The good news is: it won’t happen that quickly. The bad news is that the loss of confidence in the Bundesbank as an institution is real. The fact that the Bundesbank’s insolvency is a topic at all is a clear symptom of the decline of Germany as an economic power.
The background for possible Bundesbank losses does not lie, as wrongly interpreted by economist Markus Krall, in a possible revaluation of its bond holdings due to increased interest rates.[4] The Bundesbank will probably not carry out such a revaluation. There is even an ECB decision according to which no revaluations are to be carried out. The reason for the impending losses is rather the high surplus liquidity that the Eurosystem has created in the last decade. This money, which was pumped into the market on the principle of “whatever it takes”, will be parked at the Bundesbank by German commercial banks to the tune of around 1.2 trillion euros as of the end of 2022. For the commercial banks, this is an excellent and also risk-free business with which they are currently rehabilitating themselves on a broad front. For the interest rate on the deposit facility has increased rapidly in the last six months and is currently at 3.75 percent, but the interest rates that the banks grant their depositors are still significantly lower. This margin, financed at the expense of the Bundesbank, is also the reason why there is no threat of a banking crisis in Germany, despite the wave of insolvencies and problematic real estate loans.[5]
For the Bundesbank, however, this is an expensive undertaking, because the German government bonds, which it has bought in large quantities in order to “print” the excess liquidity, bear hardly any interest on their part, and some of them are even non-interest bearing. This is the reason for the concern expressed by the Court of Auditors, which has caused such a stir. However, it should not be overlooked that the Bundesbank’s income side also includes the interest income from the Target claims. The Target balance of currently 1.1 trillion euros is indirectly subject to interest at the main refinancing rate,[6] which is currently 4.25 per cent, so that interest income of more than 40 billion euros will be booked from this item alone. Any losses this year and in the years to come will therefore be within a range that can be covered by the general risk provisions, which the Bundesbank has at its disposal to the tune of almost 20 billion euros. An insolvency of the Bundesbank for these reasons is therefore not even close to being a realistic scenario.
The Target balances, which were so controversially discussed in the past, have thus become a net foreign position for Germany that is still infungible but now earns interest. Due to the surplus liquidity created, however, this income does not flow to the federal government but to the commercial banks. One can even say that the central banks of the Euro-South countries indirectly finance the German commercial banks through their Target liabilities, with the Bundesbank acting as a middleman. The former can cope with this, at least so far, because unlike the Bundesbank, their government bond portfolios are interest-bearing.
So is everything all right in the Eurosystem? Unfortunately, not at all. Firstly, the Target claims remain an unsecured mortgage in case the euro breaks up one day. As long as these claims are not backed by collateral, the Bundesbank is definitely broke in the event of a collapse.
Secondly, the Target claims continue to be a fever thermometer for the ills of the Eurozone. They are an outgrowth of the exports and risk-taking that Germany has provided to the eurozone without compensation since the beginning of the euro regime. This damage has already occurred and cannot simply be undone. The considerations by economist Daniel Stelter, to make use of the Target claims the are worth considering, but only if they do not amount to replacing the Target claims with government debt.[7] Because that would certainly not help anyone.
Thirdly, the decision of the ECB and, by analogy, the Bundesbank to account for all securities at amortised cost is a violation of the case law of the Federal Constitutional Court, which actually prohibited the holding of bonds to maturity. Nevertheless, this is standard practice in the ESCB. The entire balance sheet reduction, which has been initiated in the meantime but is progressing extremely slowly, is based on not reinvesting maturing papers. This practice exempts from a revaluation of the bond holdings and it avoids spectacular loss reports, but it is not legal.
The permanent breaches of law are the real collateral damage that the introduction of the euro has brought. The loss of confidence is also a symptom of this.
Notes
[1] Fischer M. (2023). Der Bundesrechnungshof warnt vor Verlusten der Bundesbank. WirtschaftsWoche. URL: https://www.wiwo.de/politik/deutschland/geldpolitik-der-bundesrechnungshof-warnt-vor-verlusten-der-bundesbank-/29222190.html
[2] ntv (2023). Müssen die Steuerzahler die Bundesbank retten? URL: https://www.n-tv.de/wirtschaft/Muessen-die-Steuerzahler-die-Bundesbank-retten-article24219062.html
[3] Chan S.P. (2023). German central bank risks bailout after money printing spree. Telegraph. URL: https://www.telegraph.co.uk/business/2023/06/26/german-central-bank-bailout-money-printing-spree/
[4] Krall M. (2023). Der Eimer der Bundesbank hat ein Loch. Tichys Einblick. URL: https://www.tichyseinblick.de/meinungen/bundesbank-rekapitalisierung/
[5] Dierig C. (2023). Plötzlicher Insolvenz-Anstieg – Jetzt erlebt Deutschland das wahre Zombie-Sterben. Welt. URL: https://www.welt.de/wirtschaft/plus246860386/Insolvenz-Plus-24-Prozent-im-Juli-Jetzt-erlebt-Deutschland-das-wahre-Zombie-Sterben.html
[6] Fuest C., Sinn H.W. (2018). Target-Risiken ohne Euro-Austritte. ifo Institut. URL: https://www.ifo.de/publikationen/2018/aufsatz-zeitschrift/target-risiken-ohne-euro-austritte
[7] Stelter D. (2023). Nutzen wir den TARGET-2-Saldo. Think Beyond the Obvious. URL: https://think-beyondtheobvious.com/stelter-in-den-medien/nutzen-wir-den-target-2-saldo/?utm_source=CleverReach&utm_medium=email&utm_campaign=beyond+the+obvious+August+2023&utm_content=Mailing_8177377