Monday, February 13, 2012

Don't forget to add Bank of Greece TARGET2 liabilities to the overall government debt

Now that everyone has become an expert on Greek sovereign debt, here is one additional piece of information worth adding to that expertise. On top of the Greek government's indebtedness, which everyone is so focused on, the Greek central bank has also built up some liabilities. These are the so-called TARGET2 liabilities to the Eurozone.

EUR millions, Source: the Bank of Greece

That amount was around EUR 105bn in December. Normally these liabilities wouldn't be an issue because they are part of the overall payment system and would be consolidated by the ECB. The problem comes in if Greece were to exit the euro. There is no mechanism to separate a single central bank from the rest of the euro-system and would mean that the ECB as a whole would be on the hook for that amount. And unlike government bonds, there is no legal framework to go after the Bank of Greece for the money. If the ECB had trouble taking a loss on EUR 40bn of government debt they bought at a discount, it would be interesting to see how they deal with the Bank of Greece on a much larger amount. Here is the liability side of the central bank balance sheet:
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