Germany's Bundesbank has entirely exhausted its stock of private assets and run up a quarter of a trillion euros in liabilities propping up the eurozone system, testing the political limits of EMU solidarity in Germany....
The operations are part of the European Central Bank's 'TARGET2' network of automatic payments between the national central banks of the Euroland club. The Bundesbank has already provided €496bn (£413bn) to countries in trouble, chiefly Greece, Ireland, Italy and Spain.
"This is reaching the danger point. It is already one and a half times the total budget of the German government," said Professor Frank Westermann of Osnabrück University. "If any of the crisis countries exits the euro or if there is an EMU break-up, the Bundesbank bears extreme risks."
The Bundesbank - the dominant body in the euro system - used to keep a stock of €270bn of private securities (refinance credit) before the start of the financial crisis. This was depleted last year as it sold assets to meet growing demands on the TARGET2 scheme.
Once the debt drama began to engulf the bigger economies, the Bundesbank was forced to borrow money to meet its obligations to offset capital flight, since it refused to sell its stash of gold. It now owes €228bn to German banks.
Bundesbank's official position is that TARGET2 does not increase risk for Germany, but there has been mounting alarm from Germany's IFO Institute and private economists.
"There are political limits to TARGET2 support. The reason why the ECB started printing money in December was to avoid pushing the Bundesbank deeper into debt," said Prof Westermann, referring to the ECB's provision of €489bn in cheap loans to banks for three years.
David Marsh, author of books on both the Bundesbank and the euro, said the TARGET2 system has the effect of locking Germany ever deeper into monetary union.
"The longer it goes on, the larger the cost of a eurozone break-up since these credits could be wiped out with horrendous losses. It is about time this was the focus of proper debate in the Bundestag, since the German taxpayers may have to pay for it," he said.
The Bundesbank does not have legal immunity for losses, the flip-side of its feisty independence. It is already at risk in Greece as the OECD and the International Monetary Fund push for the ECB system to share the burden of Greek debt-relief. The Bundesbank holds an estimated €12bn of Greek debt.
Prof Westermann said the ECB's latest lending has not been "sterilised" and amounts to money creation. While it has averted a banking crash, the move is double-edged and could intensify the crisis since the bank cannot ensure that extra liquidity stays in the Club Med bloc.
The early evidence in January is that much of ECB largesse has been used to buy Italian, Spanish, French and other state bonds. The problem is what could happen if there is a fresh spasm of Europe's debt drama and a flood of capital flight from the South into the safe-haven of German banks. The greater the liquidity, the greater the tidal wave.
"If everybody tries to get out of crisis states at the same time, this will overwhelm TARGET2. In principle, a speculative attack could occur within a day. We are heading towards the multiple equilibria zone in which beliefs of a breakdown of the Eurozone are self-fulfilling," he said.