Why banks are scared of Greek exit from the euro

Target 2 is a payment system that links banks across the 17 members of the eurozone.

Each time money is transferred betwene the member countries of the Euro, the trade is settled through Target 2. However no real money transfers take place.

Imagine that a German sells his Greek villa to a Greek for 1 million euro. What happens is his bank receives a 1 million euro credit with the Bundesbank. The Greek bank has the same sum deducted from its account with the Greek central bank.

The two central banks then have to square off the 1 million euro through Target 2. But those trades are reallty just IOUs.

Until recently the sums owed by each country's central bank were more or less in balance.

However, so much money has recently been pulled out of Greece that it now owes the rest of Europe 107 billion euros. If it leaves the euro, that sum would be wiped out. It would take out the entire capital of the European Central bank five times over.

Greek exit form the euro would have catastrophice effects of the banking system.