The Risks of Target and Cash Balances

Given that a country’s Target and cash balances claims have resulted from a delivery of goods and assets to other countries and are serviced with intra-Eurosystem interest, a total or partial loss of these claims would imply a real resource loss of its state and its taxpayers. The loss can happen if a country leaves the Eurozone, if the Eurozone breaks up or if the Target debtor country’s banks and government default. In the first case, the remaining Eurosystem may lose its Target and cash claims on the leaving country, and the single NCBs remaining in the Eurosystem would then share the losses in proportion to their sizes (paid-in capital keys). In the second case, the internal quota system may become void and each single creditor NCB may lose its respective national Target and cash claim. In the third case, the Eurosystem may effectively lose its entire Target and cash balance claims against the defaulting country even when the statutory standard case of no risk sharing applies, because the respective NCB may become insolvent internally with regard to the Eurosystem. This possibility is unrelated to the fact that an NCB may operate with negative equity capital and that the Eurosystem cannot become insolvent with regard to the non-central bank sectors. The variety of risks creates a powerful threat point for over-indebted countries to urge other member countries to help out with fiscal transfers, debt mutualization and Target credit. Thus, the ECB’s Governing Council rather than the parliaments may eventually decide Europe’s path towards fiscal unification.