Target 2

Target is short for Trans-European Automated Real-time Gross Settlement Express Transfer System. It’s a payment system used by Europe’s central banks for urgent real-time electronic transfers.

In terms of the value of payments processed, it is one of the biggest such systems in the world. Its behind-the-scenes work ensures that people and businesses across the eurozone can settle (make and receive payments on the date expected and to the account expected) reliably.

As such it plays a key role in the smooth functioning of Europe’s banking system and economy. So why is it in the spotlight now? As a successful exporter, Germany has over the years built up a current account (trading) surplus and been able to lend money to southern European countries running deficits. Now, though, much of that capital is fleeing back to Germany as investors worry about the health of southern Europe.

The European Central Bank has stepped into the void left by foreign investors pulling out of risky countries by lending their banks more money at a cheap rate. And the central bank that is effectively doing the lending is Germany’s Bundesbank. It in turn gets the funds it is lending by borrowing them from Germany’s commercial banks.

Target 2 balances between the 17 national central banks within the eurozone reflect how the extra cheap money has been allocated. The overall result is that the Bundesbank has a large Target 2 receivable balance (an asset) and the equivalent national central banks in Spain and Italy have large payable balances (liabilities).

How long this can continue is a function of two factors – how much acceptable collateral southern European banks can muster to support their extra loans and the speed and scale of the capital flight from them.

• Watch Tim Bennett’s video tutorial: What is Target 2?

MoneyWeek magazine

Latest issue:

Magazine cover
Party's over for Putin

The only portfolio safe from Russia's rout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Hedge fund manager Hugh Hendry: 'It felt like the sun rose only to humiliate me'

In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


19 December 1932: BBC World Service begins

The first royal Christmas message by George V gave the fledgling World Service an early boost six days after it was founded in 1932.