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How the Target Balances Came About: The First Phase of the Crisis

In: The Economics of Target Balances

Author

Listed:
  • Hans-Werner Sinn

    (Ludwig Maximilian University)

Abstract

Based on the development of the Target balances, various phases of the euro crisis can be distinguished, beginning with steeply rising balances because of a sudden stop and even reversal of capital flows after the bankruptcy of Lehman Brothers, and ending with further jumps in the Target balances due to unprecedented capital flight from Italy during the Corona crisis. The first of these phases was characterized by over-proportional money lending by the Mediterranean NCBs. Over-proportional money lending was necessitated by capital flight and the need to finance current account deficits, and it was enabled by loose local definitions of collateral for refinancing operations, generous provision of local ELA credit and substantial scope left for local money creation under the ANFA agreement. In general, during this phase, liquidity outflows from a country as measured by the rising Target debt was only possible to the extent that over-proportional local money creation and lending by the respective NCB replenished the local liquidity reservoirs.

Suggested Citation

  • Hans-Werner Sinn, 2020. "How the Target Balances Came About: The First Phase of the Crisis," Springer Books, in: The Economics of Target Balances, chapter 0, pages 29-38, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-50170-9_5
    DOI: 10.1007/978-3-030-50170-9_5
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