STOCK MARKET WATCH, Thursday, December 15, 2011

[Demeter]

60. Germany's Hidden Risk

http://www.businessweek.com/magazine/germanys-hidden-risk-12142011.html

The Bundesbank has quietly lent half a trillion euros to the European Central Bank. Could that determine the fate of the euro?

Involuntary lending is what happens when your teenager figures out how to charge stuff to your credit card. The kid promises to pay for the purchases but never gets around to it, so your involuntary loan keeps getting bigger. At some point it dawns on you that you might never get your money back.

Something similar is happening in Europe, except the dysfunctional family consists of central bankers, with Germany’s Bundesbank in the role of aggrieved parent. The figures are hard to find, policymakers don’t like to talk about them, and the accounting is far from sexy. Outside of Germany, headlines have been few. But the numbers are huge—so huge that they may be one of the biggest factors in whether the euro zone hangs together or falls apart.

Expect to hear more about this issue as the glow from the Dec. 8-9 Brussels summit continues to dim and the stresses on Europe’s common currency intensify. The term to remember is Target2. It’s the name for the European Central Bank’s suddenly important interbank payment system, which before the crisis was just a lowly bit of financial plumbing.

The bottom line: Germany’s Bundesbank—BuBa for short—has quietly, automatically lent €495 billion to the European Central Bank via Target2. That lending has balanced correspondingly huge borrowings from Target2 by the central banks of weaker nations including Greece, Ireland, and Portugal—and lately Spain, Italy, and even France. They are technically “claims,” not loans. To find them you have to root around in the footnotes of the reports of the 17 national central banks of the euro zone.

If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire €495 billion claim....