The announcement that the current account of the balance of payments deepened its deficit from 440 million euros to 1.2 billion euros in the last three months of last year revealed a decline in exports, an increase in imports, and a slowdown in the withdrawal of funds from European funds. However, additional published data on the CNB’s balance sheet also reveals very large changes in the central bank’s assets. The balance sheet of the central bank shows that there has been a significant reduction in the item ‘Net receivables on accounts in the TARGET2 system’, from 12.5 billion euros in February last year to the current 494 million euros. Additionally, the item ‘Foreign liabilities’ has also significantly decreased, falling from 11.5 billion to 2.7 billion euros.
Recall that TARGET2 is a payment system owned and managed by the Eurosystem (which consists of the central banks of eurozone member states). It is the leading European platform for processing high-value payments used by both central and commercial banks for processing payments in euros in real time. The general public is more familiar with this system due to a recent major technical failure that resulted in considerable panic among financial system institutions.
Million-Euro Capital Outflows
The decline of 9.6 billion euros in the fourth quarter of 2024 is mostly related to the deleveraging of foreign banks, as interpreted from the central bank’s response. The remainder represents net capital inflows that are typical in the last quarter, considering the financing needs for that deficit which are settled within the central bank systems of countries using the euro through the TARGET2 system.
– Other sectors, excluding the central bank, changed their assets and liabilities significantly less during the mentioned period (they increased foreign assets by about two billion euros and liabilities by 700 million euros, resulting in a net capital outflow of 1.3 billion euros). This outflow is solely the result of the continued deleveraging of domestic sectors towards foreign entities, while a capital inflow from abroad of 200 million euros was achieved based on equity investments. Looking at the entire year of 2024, the central bank recorded a net capital outflow of 900 million euros. Other sectors recorded a net capital inflow based on equity investments amounting to two billion euros, which was completely offset by capital outflows through deleveraging towards foreign entities – stated the CNB’s response.
When observing the CNB’s balance sheet, from mid-2023 to early 2024, a significant increase in foreign liabilities is visible, which can largely be explained by repo transactions with foreign banks. Recall that in repo transactions, a bank seeking a loan from the central bank initially borrows money while simultaneously selling securities that serve as collateral to the central bank. In the second phase, the debtor bank returns the borrowed money increased by interest while repurchasing those same securities from the central bank. The money that the CNB receives in the first phase is recorded in its balance sheet as an increase in foreign liabilities, i.e., an increase in obligations to foreign banks, but at the same time as an increase in net receivables on accounts in the TARGET2 system.
Less Money from EU Funds
– Thus, foreign liabilities increased from around 3.8 billion euros in June 2023 to 11.7 billion euros in January 2024. However, in the second step, the maturity of repo transactions in the CNB’s balance sheet is recorded as a decrease in foreign liabilities, and simultaneously as a decrease in net receivables on accounts in the TARGET2 system. Since the contracted repo transactions largely matured by February 2025, after which they were no longer renewed, the CNB’s foreign liabilities decreased again to 2.8 billion euros. Changes in net receivables on accounts in the TARGET2 system were greater than changes in the CNB’s foreign liabilities since, in addition to inflows and outflows of funds based on the CNB’s repo transactions, other transactions of the CNB and transactions of commercial banks with foreign entities (i.e., foreign transactions of their clients realized through banks) also affect the change in the TARGET2 system balance – explained the CNB.
