Ferchi

In any event, it’s easy to see how the Bundesbank’s Target2 balance has been rising of late, as the balances in the periphery have been declining: there’s a flight-to-safety going on, and German banks are (rightly) perceived as being safer than banks in Spain, Greece, and other peripheral countries. Similarly, German banks which lent money to Spanish borrowers — and especially to Spanish banks — are not rolling over those loans. When the loans are repaid, the German banks just keep that money on deposit at the Bundesbank, rather than lending it out again to some country in serious difficulties. Once again, that increases the Target2 balance at the Bundesbank, and whenever that happens, there’s an equal and opposite decrease in the Target2 balance elsewhere.