Italy is increasingly dependent on the ECB to hold down bond yields as foreign investors dump Italian bonds like mad.
Eurointelligence bills this as “Further Evidence of Capital Flight in Italy“.
In a column earlier this week, Federico Fubini notes that, according to the Bank of International Settlements, in 2016 international banks reduced their exposure to Italy by 15%, or over $100bn, half of it in the last quarter of the year. The counterpart to this exposure reduction is the increase in the negative Target2 balance of Italy, which the ECB has already attributed to foreign investors selling into its asset purchase programs, and reinvesting the proceeds away from Italy. As a result of all this, Italy’s financial stability is increasingly dependent on the ECB.
The Capital Flight article by Federico Fubini is in Italian. Here is an unmodified snip from the article.
Distrust Widespread
Clearly, therefore, there is a conspiracy, but a widespread distrust of the direction being taken in the third euro area economy. Especially the banking system in Germany seems to have developed a deep-seated distrust. His exposure to the country late last year is worth little more than a quarter of that of the French banks, and now has dropped so much that is 30% below that that German institutions had on Italy at Euro 1999 debut. No other major banking system has implemented a retreat of these proportions, as if the integration of the single currency had never even begun.
The loss of one hundred billion dollars by large foreign banking investors would be a blow, not for purchases of Italian bonds by the European Central Bank. Throughout 2016 we continued at the rate of about ten billion Euros per month, on corporate bonds and especially on sovereign bonds. In fact the release of foreign banks is linked to the ECB intervention, because those have the opportunity to sell at the Institute of Frankfurt good part of their Roma government bonds. It is no coincidence if the public debt held abroad fell by 42 billion in just the first nine months of 2016, according to Bruegel. The irruption of the ECB in the market and the withdrawal of foreign banks are thus two sides of the same coin. The result is that the Italian financial stability is becoming more and more dependent on the support of an international institution, that next year will almost certainly cease.
I spoke about this process before in Target2 and Secret Bailouts: Will Germany be Forced Into a Fiscal Union with Rest of Eurozone.
One person I highly respect is adamant (or at least was) that rising Target2 does not represent capital flight.
But what else do you call it when foreign investors dump Italian bonds to ECB, the buyer of only resort?
Miker “Mish” Shedlock
