As soon as any major country exits the Eurozone (and possibly some lesser ones), a cascade of defaults, unparalleled in history will commence. The only way to stop such a cascade would be if the ECB guaranteed (printed) enough euros to cover losses.

Meanwhile, the already high Eurozone default risk keeps rising.

From Eurointelligence via Email.

German Target2 Surplus is fast approaching the one trillion

Each month, Germany’s Target2 surplus has been rising. The Bundesbank yesterday published the data for end-February, showing a new record of €814bn, up by a further €20bn during the month. This level is now significantly higher than it was during the peak of the eurozone crisis. We would assume that the rise in the German surplus will be offset by parallel rises in the deficits of Spain and Italy, which were €350bn and €364bn in January. The rise is in part explained by the ECB’s asset purchasing programs – the sales of Italian bonds by London-based investors often clear through Frankfurt, but the investors generally do not reinvest in Italy, but elsewhere. In other words, the QE program is the direct cause but it hides an underlying trend of capital flight out of Italy of the same scale as during the crisis.

Frankfurter Allgemeine, which watches over the Target2 surpluses like a hawk, has a revealing comment by Jens Weidmann. The Bundesbank has generally tried to distance itself from the position of some German economists, who have emphasised the importance of the Target2 system. That’s still the official position. Weidmann said that he agreed with Mario Draghi that a country that exits should settle its Target2 liabilities in euros. But then he made an important qualification:

“What that looks like in practice, and whether a government was willing or able to meet these claims, is a wholly different issue altogether.”

We see it exactly the same way. Any exit would cause so much financial stress, and give rise to such political recriminations on both sides, that it is inconceivable that these balances would ever be paid up. This is why a euro exit invariably constitutes a series of massive defaults – without parallel in economic history.