The Greek central bank’s debt to the ECB increases in turn, while the Bundesbank’s claims on the ECB  4  BIS central bankers’ speeches  increase accordingly. Such changes in claims and liabilities are expressed in the TARGET2 balances. Chart: TARGET2 balances In a well functioning market, the bank that had drained its central bank reserves would borrow to replace them in the interbank market, balancing the transfer described above. Imbalances in TARGET2 are a symptom of an interbank market that is not functioning efficiently between all countries in the euro area. If banks in the north are no longer willing to lend to banks in the south, the southern banks must meet their need for reserves by borrowing directly from the central bank. The northern banks increase their reserves at the central bank accordingly. In addition to increasing the claims in the TARGET2 system, this inflates the Eurosystem balance sheet. The central banks are the hub of the system and are required to receive deposits from areas where banks have a surplus of reserves and extend loans to areas where banks as a whole need more funding. Imbalances between countries in the TARGET2 system give no indication of who will bear the losses if a bank defaults and the value of the collateral posted is not sufficient. Any losses are allocated among the participating national central banks according to their relative shares in the ECB’s paid-up capital.
These schemes pursue low, stable inflation, healthy public finances, strong and well regulated financial systems and realistic exchange rates. Of course policies vary from one country to another, but their basic principles are shared. In Chile, a fiscal policy that saves during good times, an autonomous central bank that conducts monetary policy under an inflation targeting regime and a floating exchange rate, were key elements to successfully work its way out of the crisis. Furthermore, the country has a solid, well regulated financial system that does not allow for many of the operations that dragged some economies to their  BIS central bankers’ speeches  1  troubled present-day situation. A traditional banking model dominates the banking industry, where a strong base of deposits, both personal and institutional, permits to finance mainly credits. Before the crisis, a lot was said about the decoupling of emerging economies’ growth path from that of developed countries. This idea, which gained momentum in 2007 and 2008, was seriously questioned during the disaster because, as I said, no one was spared its effects. In hindsight, however, we can say that there actually was a decoupling. It is true that in a globalized world commercial and financial intertwining does not allow the economies to isolate themselves from the global cycle, but the performance of emerging markets is living proof that mitigating the negative consequences from the external cycle can be done.