How German taxpayers prop up Italy
I can't move at the moment without someone bending my ear about the vulnerabilities of the eurozone's central banking payments system, TARGET2.
It hasn't quite got to the stage where the driver on the W3 bus won't let me on without a lecture about how the German Bundesbank - in spite of protestations that it would never do this - has found itself in effect financing the massive debts of Greece, Italy, Portugal and so on.
But hedge fund managers, City analysts and academic economists are obsessed with whether the enormous credits and debits within this payment and settlement system either show that the eurozone is doomed, or that the consequences of a eurozone collapse would be so disastrous - for Germany in particular - that eurozone governments will eventually make the big political leap necessary to save the currency union.
So what's all the fuss about?
Well TARGET2 allows cross-border payments to be made within the eurozone. When money moves from an Italian bank to a German bank, for example, the account of that Italian bank at the Bank of Italy (the Italian central bank) registers a debit and the account of the German bank at the Bundesbank (the German central bank) registers a credit.
All of which is just a mundane description of what is necessary in a technical sense to create a monetary union for 17 European countries which hitherto had their own currencies, and retain their own banking systems and central banks.
But here's the thing. As the eurozone has evolved, especially in recent months, there has been a rather striking increase in the credits at the Bundesbank, and in credits at the central banks of other eurozone nations whose finances are perceived to be strong, such as Luxembourg, the Netherlands and Finland.
These positive balances at the central banks of the saving and exporting economies corresponds with growing negative balances at the central banks in weaker economies, notably Italy, Greece, Ireland, Spain and Portugal.
Broadly, what this means is that the central banks of the economies with bigger debts owe a colossal amount to the German central bank.
So, for example, in August of this year the TARGET2 net positive balance for Germany was 390bn euros, up by more than 60bn euros in three months. And the negative balance for Italy was 57bn euros, which represents a deterioration of more than 70bn euros over the same period (according to an analysis by Deutsche Bank).
Now some of this swing may have stemmed from German-based lenders to the Italian government wanting their money back, when Italian government bonds fell due for repayment. And in order to repay them, the Italian government would have sold new bonds to the Italian banks.
The repayment of the German creditors would then have taken place through the TARGET2 system, creating a debit at the Bank of Italy and a credit at the Bundesbank. And the Italian commercial banks would almost certainly have dumped their new holdings of Italian government bonds on the European Central Bank as collateral for loans from the ECB.
So there has been rising exposure to the Italian state of both the European Central Bank, through loans to Italian banks, and of the Bundesbank, through the TARGET2 payments system.
What's more, in the past couple of years similar trends have been observable in Greece, Portugal, Ireland and Spain, with their banks and public sectors becoming more financially dependent on the ECB and the Bundesbank: according to Deutsche Bank, the TARGET2 liabilities of the Greek central bank was 91bn euros in July.
Now it is a pretty good bet that the TARGET2 positive balance of the Bundesbank has risen very sharply in the past six weeks, while the negative balances of Italy, Greece and so on will have jumped, because there has been observable capital flight from the banks and public sectors of the economies perceived to be weaker.
All that said, none of this would matter much if we could be completely confident that monetary union is forever and no member could ever leave. It would be an interesting technical nicety.
So why does it matter if Greece owes 91bn euros or more to the Bundesbank and other central banks, if the Greek central bank is just the right-hand liability column of the consolidated accounts of the European central banking system?
Of course that technical nicety points to an underlying economic problem, namely that some countries in the eurozone - Greece, Portugal, Italy, Spain, Ireland and so on - have been consuming more than they earn, which is not sustainable forever and needs sorting.
And, to digress for a second, if you wish to be a bit gloomy about the ability of today's European Union summit to clear up the eurozone's mess, you would note that what is on the agenda does not address the eurozone's serious structural weakness - which is the imbalance between Germany as the great producing and saving nation, and much of the rest of the eurozone as consuming and borrowing nations.
Martin Wolf was searing in yesterday's FT about how the Franco-German plan to limit government deficits does not tackle how German efficiency and thrift has for years been subsidising Spanish, Italian and Greek inefficiency.
Rather than improve their productivity to boost exports adequately, the households, business and governments of the weaker eurozone economies in effect borrowed from Germany to boost lifestyles (and on Sunday I explore what all that means for our economy in the next ten years, in part two of "The Party's Over - How the West went Bust").
That said, if we assume that at some point the eurozone will set about correcting this fundamental source of instability - which requires painful cuts in the real wages of workers in the debtor nations, and an increase in German consumption - then the related imbalance between eurozone central banks via TARGET2 doesn't matter.
Over time, as Italy, for example was seen to be getting its debt burden under control, those who have lent to the Italian government would feel less compelled to get their money out - and that would be reflected in the Italian central bank owing less to the German central bank in the eurozone banking system's TARGET2 internal book-keeping arrangements.
But here's the thing. Right now, we are a long way from the creditors to Italy, Spain, Greece and the other highly indebted economies feeling wholly confident they'll get all their money back. And as a result we cannot be certain that a run on either the banks or the governments of these countries won't lead to the fracture of the eurozone.
Which means that the hundreds of billions of euros owed to the German central bank by the weaker eurozone economies does have a bit more significance than as an accounting entry in a giant consolidated balance sheet for the eurozone.
To put it another way, if there is the faintest chance of Italy, Greece, Ireland and the rest reverting to their own currencies and reneging on what they owe, then Germany's net positive balance of 390bn euros on the TARGET2 system (which is probably significantly bigger than that now) is German taxpayers' money that is seriously at risk of loss.
That's why the optimists say that Germany simply has too much at stake to allow the eurozone to collapse - and also why those who believe the eurozone can't be fixed are an anxious bunch.
Update 11.54: I knew what I was doing when embarking on my exploration of the TARGET2 payments system: I would inevitably encounter on my travels many members of the religious order of monetary seers.
Anyway they've already set me on the path to true enlightenment in one sense, by pointing out that in theory the Bundesbank is on the hook for 27% of eurosystem liabilities, rather than its gross TARGET2 exposure.
I'm not sure however that this makes the German position fundamentally stronger, at a time when those liabilities are increasing, and the value of the collateral underpinning it (Italian government bonds, for example) is shrinking.
Update 13:35: A helpful hedgie has pointed me towards the latest data on the Bank of Italy's TARGET2 net liabilities.
The Italian central bank's net claims against the eurosystem have jumped from 57.5bn euros in August to 147.5bn in November - which indicates there has been significant capital flight in recent weeks (no surprise there).