FRANKFURT (Reuters) - A steady stream of cash from the euro zone’s periphery to German banks is likely to dry up once the European Central Bank unwinds its huge bond-buying program, an ECB research paper showed on Friday.
The central banks of Italy and Spain have accumulated record debts toward the ECB’s Target payment system while Germany piled up a huge credit since the 2015 launch of the ECB program, which has now surpassed 2 trillion euros and is widely seen as nearing its end.
Some scholars, including Harvard professor Carmen Reinhart, called these flows a capital flight, but the ECB has said they are a mere function of bond purchases by the euro zone’s central banks from sellers using German banks.
The new study, penned by five ECB economists, said the imbalances were set to subside when national central banks across the bloc start selling down the bonds now on their balance sheets.
“A normalization of central bank balance sheets and the ensuing reduction in the level of excess liquidity should naturally bring about a significant retrenchment of Target balances,” the authors said.
They added the imbalances were further fueled by investors buying foreign securities through financial centers in Germany, the Netherlands and Luxembourg.
Germany’s Bundesbank posted claims of 856 billion euros toward the Target system, which tracks all cross-border flows inside the euro zone. This was slightly more than Italy and Spain’s combined debt toward Target.
Payments via Target are not settled by national central banks. That means any debt would have to be paid if a euro zone country left the bloc, as ECB President Mario Draghi recently said in a letter to two Italian lawmakers earlier this year.
The threat of defaults on cross-border debts has often been credited as one element keeping the euro zone together throughout the financial crisis.
Reporting By Francesco Canepa, editing by Larry King