Italy: Target2-deficit drops slightly in June - ING

After two years of capital outflows facilitated by QE and TLTRO, the Italian Target2-deficit appears to have stabilised in 2017Q2, according to Teunis Brosens, Senior Economist, at ING.

Key Quotes

“Banca d’Italia figures today show that the Italian Target2-deficit dropped by €8bn to €413.9bn in June. In essence the deficit has been moving sideways since March. This means that the vicious link between Banca d’Italia’s Italian government bond purchases under the QE programme and the Target2 worsening appears to have broken.”

“Until 2017Q1, the Italian Target2 deficit widening closely tracked QE govie purchases. Banca d’Italia’s purchases allowed foreigners to sell Italian sovereign bonds, but also Italians themselves to instead diversify into foreign assets. In addition, foreigners sold Italian bank and corporate bonds, balance of payment data show. The capital reallocation away from Italy appears to have come to a halt in Q2.”

“To be sure, in a stable Eurozone, intra-Eurosystem Target2 claims and liabilities are as meaningful as claims between the New York and San Francisco Feds. Yet they do reveal sustained capital reallocation across the Eurozone. From that perspective, the fact that the Italian Target2-deficit has stopped increasing, is encouraging.”