What are the mechanisms by which the Target2 liabilities of Southern Eurozone countries have been generated? Why have Southern Eurozone countries not implemented adjustment policies fast enough? To address these issues we document a set of stylized facts that characterize the patterns observed in the Eurozone, and present a political-economy model that accounts for these patterns and that allows us to interpret the Target2 mechanism as a systemic bailout guarantee. ∗I thank Young Kim and Jacob Kirsch for excellent research assistance. I thank Guillermo Calvo, Maria Casanova, Francesco Casseli, Pierre-Olivier Gourinchas, Ken Kletzer, Alexander Lipponer, Joe Ostroy, Paolo Pesenti, Philippine Thiman, and participants in seminars at Banque de France, the Bundesbank, the ECB, Freie University Berlin, ITAM, UCLA, USC, as well as at the Bank of England-CEPR and the ECB-Federal Reserve conferences for helpful discussions. The research in this paper was partially funded by a Faculty Research Grant from the European Union Center at UC Berkeley.