Tuesday, 8 January 2013

Why There’s a Eurocrisis

It’s to do with payment systems.  Bear with me.

In the U.K., payments between customers of different banks, or the banks themselves, are handled through a system called CHAPS.  Briefly, what happens is this.  Bank A needs to send some money to Bank B, so they send them a message – a payment instruction.  This message gets copied to the Bank of England, with whom both A and B hold accounts.  The Bank of England debits A’s account and credits B’s; B then knows it has the money and can dispose of it as per the underlying transaction. So far so good.

Until the late ‘90s, the totting-up took place once a day, after close of play, it being assumed that the system was based on trust and the Bank of England would carry the can should Bank A not cough up– until some bright spark there woke up one day and said “erm, actually, we won’t.  Because they might break their promises, and we can't afford the consequences.”  Thus was born the system known as Real Time Gross Settlement, or RTGS.

RTGS says, in effect, that Bank A must be able to afford the payment at the moment it sends the instruction to Bank B.  In other words, it must have the money in its account at the Bank of England, there and then.  If it hasn’t, it must ‘post collateral’, which means pledging items of value, such as securities, against this debt.  In practice, payments tend to flow in both directions during the day between A and B (and there are of course the equivalent of overdraft limits before the need for collateral kicks in).  So it worked fine for years.*

Then, enter the Euro.  After a few false starts, they realised that they needed something similar, covering the Eurozone of seventeen countries, and after a few false starts they came up with a system which is an almost exact replica of the above, but with an extra layer added at the top – in addition to the Banks A, B etc. paying their national central banks (Bank of England equivalents), the national central banks would also need to settle with each other.  Obviously, this would be done through the central banks’ central bank, the European Central Bank (ECB).  The system they put in place for this is called TARGET.**

What they forgot, though, was RTGS.  Remember that?  Cash on the nail.  Of course, TARGET provides for this within each country – but there is absolutely nothing that forces the national central banks – the countries – to settle with each other at the ECB.  No totting up at all, ever, never mind payment by payment.  Oh, and no need for collateral either.  Just keep running up the debts – and dues– for ever. 
Which is exactly what has happened.  So now you know.  That’s why there’s a Euro crisis.  No recourse for broken promises.
If only they'd asked me at the time!


* I do wonder how it coped with the events of 2007-8. Hmm ...
** TARGET2, to be exact, if you want to Google it – the Wikipedia article is excellent, though it does require a bit of concentration.


  1. Not going to Wiki on this...Blimey! Just reading this post hurt my brain.It's like the 3 card trick, isn't it? Come to think of it, it IS the 3 card trick!

  2. Once you've explained it, it falls under what Mr Cleese would describe as "the bleedin' obvious".

    It's all greek to me....

  3. I read the Wiki article. A fair bit of it, anyway. And it reminded me of when you put house rules into Monopoly so that you all end up with IOUs and it gets more complicated until it all falls apart and someone has a tantrum and throws the board through the window,

  4. I know, Dinah, mine did too. That's why I don't do this sort of stuff very often, preferring to burble about xmas cards and washing machines. To think I used to do this kind of thing for a living ... ugh!

    Rog - and spanish, irish, portuguese ... (btw, no word from Mr Pesto yet, not entirely surprised as I cribbed the idea from an article in the guardian which he's probably already read).

    Nail hit right on the head, Zed. 'House rules' are why we're in this shit. But the board won't go through the window, because they're all too tired to pick it up.

  5. There are 5 alternative solutions to the crisis:
    a. tip the board so the pieces fall out of the window - the angle of declivity will dictate the speed & may allow for some rescue initiatives by those who have not yet fallen;
    2. thrust the board vertically into the air & see where the pieces land (warning: as they live near the edge, pigs may fall off);
    iii. burn the board (climate change will help get it alight; if necessary use firelighters - UKIP is a useful brand);
    IV. close the board, put it back in its box with all its accoutrements & go for a contemplative walk in the forest. Beware of bears & parasitical stinging insects;
    e. none of the above.

  6. Can I be a complete geek and recommend John Lanchester's "Whoops".
    Banking crisis for beginners and readable?

  7. Richard - meticulously incisive as always. btw, what's your new Monopoly token going to be? I seem to remember I was the thimble.
    Even more btw, you can't have 5 alternatives, however well disguised. Only two are permissible, by the laws of English - though these may of course vary in different parts of the universe.

    Macy, I did sort of read that, and have miraculously found it in the pilebrary, will have another look. He doesn't mention target in the index, though.

  8. My new token? What's available these days? Wind turbine?
    We do have several alternative forms of the English language here in Devon.

  9. I was always the top hat.

    BTW we have the original nails in this fair city.

  10. I have my suspicions about this Monopoly token thing. There are news reports all over the place (just google monopoly tokens), but Hasbro's website is entirely silent on the subject, and the only way to vote seems to be via this facebook page.

  11. If my mother had still been alive she, and my two brothers, could have solved the whole Eurocrisis and got everyone back on track.

  12. this is a bit like a cooking post ...

    nuff said