Critics worry about ECB nonchalance over payments stress

Fri Feb 10, 2012 10:27am EST
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FRANKFURT (Reuters) - European Central Bank President Mario Draghi's apparent lack of concern about growing imbalances in money being transferred between euro zone countries has revived criticism from those who see the issue as a budding new crisis.

Hans-Werner Sinn, the president of the influential German think tank Ifo, sparked a debate last year by arguing that stronger countries such as Germany were financing the deficit extravaganzas of Greece, Portugal and Ireland via the bloc's cross-border payment system, known as TARGET2.

Essentially, weaker economies have built up liabilities that are making the stronger ones vulnerable. The latter would be in particular danger if the euro zone breaks up - which few expect - but critics say the stresses pose threats even without that.

When asked, however, during the ECB's monthly press conference on Thursday whether such dynamics could hurt Germany's credit rating, Draghi rebuffed the idea, saying such developments were normal and inherent in a monetary union.

"When funding conditions become stressed in some parts of the euro area, then you see that the countries that are not stressed accumulate claims towards the countries that are under stressed conditions," Draghi said.

"But this does not imply any more risk for the so-called creditor countries."

Central banks in Greece, Portugal, Spain and Ireland have run up large TARGET2 liabilities as cross-border loans dried up, the private sector withdrew capital and banks turned to the ECB for funding because banks from the stronger economies stopped lending to them.

Germany's Bundesbank, on the other hand, has accumulated TARGET2 claims as more money was transferred into the country than went out. Central banks hold these claims and liabilities against the ECB, which acts as a middleman for the transfers.

Reacting to Draghi's comments, Sinn said such imbalances were indeed normal, but not on the scale currently seen.   Continued...

<p>The European Central Bank (ECB) President Mario Draghi speaks during the monthly news conference in Frankfurt, February 9, 2012. REUTERS/Alex Domanski</p>