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.
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
Germany has developed a deep seated distrust of Italian bonds? But it still wants Italy to buy its exports. Maybe the Germans out to be buying more pizza and spaghetti with meatballs to even that trade imbalance and gain more confidence in Italian bonds. What was that scene in the film Network? “The Arabs have taken billions out of the economy and now must put it back. It is the ebb and flow, the totality of business.” Great current account lesson even for Hollywood.
I have a theory (hope?) that, by exchanging government debt for banknotes (or 1’s and 0’s), central banks are displacing government credit risk in markets.
After all, cenral banks are themselves governed/owned by goverments. Banknotes (1’s and 0’s) are bearer bits of paper with no maturity date or coupon (or even a negative interest rate with an indefinite term – depending on the duration of QE/NIRP).
It follows that it is theoretically possible for central banks to simply cancel all the government debt they have bought in exchange for bank notes (1’s and 0’s) via an exchnge of letters between governments and the central banks where the government simply announces that it has extinguished the government debt held by the central bank and the central bank leaves the banknotes in the “system”.
this would serve to reduce the governmet debt to gdp ratios to affordable levels (say 40% of GDP). the biggest beneficiaries would be the most interventionist central banks, China, Japan, the ECB, the Fed and the Old Lady – in that order.
It may be that I have been captured by the pseudo scientific quackery that goes for monetary policy experimentation these days, but still. it has me thinking that maybe, just maybe, there is method behind central bank madness.
Otherwise, “”Insanity: doing the same thing over and over again and expecting different results.” – Albert Einstein” and this is the more accurate description of central bank press conferences https://www.youtube.com/watch?v=jZ572yLH9sc
A debt jubilee will be a party for debtors but a disaster for creditors. Can´t be done without huge consequences.
can you call the extinguishing of paper “fiat” debt a “jubilee”?
It seems to me that central banks are the de facto largest unsecured borrowers on the planet. their balance sheets are secured by fiat , not by taxes. If central banks were secured by taxes, they would be subject to democratic process – they are not, in fact, exemption from the rule of law is enshrined in, for example, the ECB charter.
In theory, (experiment?) any country can walk away from its central bank – though that would assume that any politician has any clue as to what good or damage any central bank is doing to all voters in a country, rather than just, for example, encouraging a debt ridden voter base that is the inevitable corrollary of socialism.
As an aside, the ECB is buying corprate debt, the BoJ and the SNB are purchasing equities in general and the SNB, AAPL in particular – extending the madness of central banks into “print money – crowd investors – directly ramp public security prices”. So we have central banks monetizing fiscal deficits AND corporate deficits (from an inability to make money using slave labor and tax evasion schemes, like AAPL, SBUX and Goog).
Yes, excellent description. Government won’t walk away from central banks as long as the CB does all the dirty work. The CB buying mortgages, corporate debt, and equities is de facto socialism but enough people can still pretend the CB is acting independently instead as an agency of Treasury. Government walking away from a CB is de facto walking away from its Treasury, which is essentially a government collapse.
Looks like we’ll have to wait for Illinois to go into (de facto) receivership to see how things play out. Shouldn’t have to wait too long.
In the absence of a jubilee, something will break eventually, won’t it? This cannot go on indefinitely. Ultimately interest rates must rise.
Jon Sellers said:
In a purely fiat monetary system, interest rates are a function of inflation only. Interest rates are low because inflation is low (at least the measures of inflation the Fed cares about). Adding debt to the system pushes down inflation over the long term because debt payments suck money out of the system, reducing demand.
So, yes it can go on for a very long time. Inflation ultimately is a function of demand, which is a function of increasing wages. When you start seeing everybody getting big pay increases, you will start seeing interest rates going up. Moderating wage hikes, which has been happening for the last decade or two, is the “something” that has to break.
Stuki Moi said:
It will also be a complete disaster for all those who either did not live way beyond their means, or had little means to obtain credit in the first place. After a “debt jubilee”, not only will the Asset pump beneficiary class own all of the world, as they do now. They will own it debt free.
Hence ensuring an even bigger repeat next time, as even the most prudent will then realize simply racking up as much debt as possible then get bailed out, will be the only game in town.
Instead of childish, harebrained constructs like “debt jubilees” or other nonsense, just use time honored bankruptcy processes. Which are designed specifically for situations just like these: All debt is forgiven, all assets turned over. Note, assets being turned over, doesn’t mean they’ll disappear. They’ll just be spat back out at firesale prices. But now, after the debt fueled pumping has been reversed, to a population where the means to purchase them are much more evenly distributed. So, the average guy will just buy his house back before he’s even evicted, since the chances of anyone else being able to outbid him for it, is virtually nil, once the whole credit pyramid is unraveled back to $20/oz of gold.
Sounds close but usually the bankrupted can’t afford nor are allowed to buy back their house. Could be years before they have another job or are able to save for another house. $20/oz gold or hitting the reset button means major depression loss of jobs, buisnesses etc., maybe not so simple?
Chris Wagner said:
https://www.youtube.com/watch?v=5IJeemTQ7Vk and read “The Creature from Jeckyll Island” (free pdf online)
Target 2 is a settlement system between € central banks. By end of March 2017 the NCB of Italy has borrowed € 419.8 bn from other NCBs in the € area.
Why does the NCB of Italy need to borrow € 419.8 bn from other central banks? Because capital is fleeing Italy. It is also an element that the NCB of Italy buys Italian government bonds under the QE programme from non Italian banks. The Italian NCB has to borrow from other NCBs to settle that trade. So the QE programme has contributed to the imbalance.
Regardless, the NCB of Italy owes € 419.8 bn to other eurozone NCBs. These loans done without collateral and with an interest of 0.25%.
So the question remains; how will this credit be repaid?
Or maybe the question is “what will happen once it becomes clear that the credit will never be repaid?”
Of course the long and the short of it is that ‘this credit’ will never be fully repaid.
Italian commercial banks are trading at deep discounts to equity book values. So the smart money has fled. Funding in these difficult times has been provided the Italian NCB in addition to funding from local “dumb” money apparently believing in the non existent € 100 000 deposit guarantee.
The NCB funding is around € 400 bn, similar to the size of non performing loans.
Italian commercial banks are insolvent. End of discussion. So they cannot repay their NCB and the NCB cannot repay the ECB system.
I cant say I understand all the consequences but I do know the Euro was a method to help integration of EU states into a combined United States of Europe – Supra Nationalistic.
Somewhere in this that is the ultimate end game. Germany, France, Italy will be forced together irrespective of the will of the people and the others will follow.
The price paid in Southern European unemployment and Northern European tax payer funds will be see as a necessary cost. Nothing will be allowed to stop this juggernaut.
Any credit crises will be seen as a stepping stone to the required outcome, not a reason to allow it to fall apart.
More Euro, more EU, closer ties – the answer to everything in Europe.
People are getting increasingly angry because the understand that this is the EUSSR. Brexit is one example, so the Berlin wall has already fallen. In the first round in France almost 50% of voters backed EU exit candidates (Le Pen, Mélenchon + others).
A 50% difference in productivity between Germany and other euro nations will require more transfers via Target 2 in the future. How much more? € 420 bn today. Is 500 the limit? 700? Anyway, we are already beyond the point of no return.
Lars – 2 questions I certainly don’t know the answers to.
1) How to avoid losing money form this situation if in EU or UK?
Obviously avoid Italian debt. What else?
2) How to make money out of it?
What about EU equities as a route to a return?
Any way to short Italian debt?
Probably best to take a defensive stance and buy gold, silver and cryptocurrencies. And keep an eye on risks of capital controls and confiscation.
Only Greece owes € 500 bn on state level, so the creditors will be destroyed by Greece alone.
Next year, negotiations for a EU finance minister will begin. Be afraid, be very afraid!
Q: does someone know what became of the EU’s lawsuit vs Germany for single handedly cancelling the Dublin I-III agreements?
IT’s all a sham. The eU wants an end to border controls. And Italy has been taking in those boat people because they knew they would march to Northern countries…
The MSM in Germany stopped being critical years ago. We live in Orwellian times!
David Hannum said:
“Germany, France, Italy will be forced together irrespective of the will of the people and the others will follow”. Sounds like what went on about 77 years ago…Ein Fuhrer, ein Reich, ein volk…only this time the “vierter Reich” got it right.
Read the below. Achieved with trade and finance instead of Guns and Bombs. How many Europeans really understand the dynamics?
Part of this is now the game plan for the EU vs UK in Brexit. Make the UK incapable of competing for years and crush. They expect the UK to come back to the EU and then take on the Euro, full package as per WOLFGANG MUNCHAU article in the FT.
Gloves are off.
Berlin – The September Memorandum (September 9, 1914)
“Make the UK incapable of competing for years and crush.”
London has a thousand ways to undermine the EU. Been doing it for centuries.
London + New York + Tokyo + Singapore + Hong Kong + Dubai tied together like Siamese Sextuplets. Same banks, same interests. Ain’t gonna happen.
I hope you are right. UK needs to come out fighting to defend itself vigorously.
So the better performing countries support the nonperforming countries and they’ll all be forced to do this to avoid economic devastation? You’re only talking about kicking the can a little further down the road, the elephant in the room is debts that cannot be paid won’t be! The real problem is debt overload, a political union does not cure the disease. Besides the nationalistic rise of the underemployed aka democracy might get in the way of a short gap solution. Assets have to collapse one way or another.
The Euro-zone debt crisis has taken a heavy toll on Italy where consumption and investment are expected to remain weak. The country’s economy has shrunk by around 10% since 2007 and output has regressed to levels not seen in more than a decade. Italy is moving towards failure.
While Italy talks about its commitment to fiscal reform it continues to run a budget deficit of 3%. With government debt standing at $2.4 trillion dollars around 140% of GDP. This has spilled over to their banking system and resulting in the lack of faith we are seeing today. More on the subject of just how bad this is in the article below.
anyone who thinks this gets papered over and ‘everything will be alright’ is lying to themselves…..this blows up in 2018 regardless of who wins in France
2019/2020 in my book and it will be used as an excuse to force higher levels of integration and harmonisation. Italy will cease to exist and become a vassal of the EU, surrendering all tax and spend.
Medex Man said:
You are day dreaming to think the EU could financially support Italy. Its a much bigger country and much bigger economy than Greece…. and the EU already proved beyond any shadow of a doubt that they do not have the resources to fix Greece.
Italy won’t last a year on the EU dole… the EU won’t survive.
Time to stop reading the official propaganda pages and deal with real world numbers
You forget it is a religion. They’ll do whatever they have to to keep it alive.
ECB cancel downturn debt, print etc. Germany forgives debt. Whatever it takes.
Medex Man said:
Just because you refuse to accept that the Titanic is sinking does not change the facts.
I am not doubting whether some people will attempt to tread water in 35 degrees and deny that the ship went down. We all know that drunks like Junkcer think temperatures are higher than they actually are. But the ship went down anyway.
Whatever it takes isn’t good enough. The total wealth to keep the EU afloat was never there, and the deliberate destruction of the German economic engine means Germany et al can service less and less debt.
The EU isn’t a religion. Its a cult, and the cult leader is telling believers to drink from the poison chalice to “save the dream”….
Read the below,. Achieved with trade and finance instead of Guns and Bombs. How many Europeans really understand the dynamics?
Berlin – The September Memorandum (September 9, 1914)
Medex Man said:
Do those docs talk about how the French tried to live off German war reparations from 1918 through 1930?
The Versailles Treaty created the conditions where a man like Hitler could rise to power. If the EU somehow finagles its own Versailles treaty (making all debt community debt is no different from saying it is German debt)… the EU will be held responsible in every history book for starting the next European-wide war.
Germany can’t support the rest of Europe even if they wanted to. The EU is finished. The only question now is whether the EU will implode with a whimper or a full out war.
Let’s all hope you are wrong and pray that the EU isn’t allowed to ferment a war.
It’s the playbook for how they will handle Brexit
French always like punishment as a response.
Medex Man said:
There is still a decent chance that Le Pen wins the election (I don’t care what the media thinks, their track record on calling elections is worse than flipping a coin). Le Pen will undermine the EU in France, assuming she doesn’t officially Frexit. Official or not, France is not able to contribute enough to keep the EU alive, even if Macron wins.
Several Italian candidates also want to dump the EU… which means Italy will be leaving the EU. You can argue whether Ital-exit will be an official departure or a defacto departure, but its happening either way.
The ECB tricked (as in fraud) investors into thinking their grab for extra yield was “risk free” and it simply is not. The ECB’s ability to guarantee payments is in doubt, whatever the official decrees might say. If you are a German investor, and the ECB robs you to pay Italy to pay the Italian bonds you own… how does that make you whole? It doesn’t even before you subtract a criminal fee to pay Draghi.
German investors are pulling out of the EU, which is why I keep writing comments that MERKEL may or may not still support Brussels — but Germany does not.
I have a problem envisaging anything other than greater integration whatever the expense. Italy might look to leave the Euro (but have to payback according to Draghi) but not leave the EU.
How can they do either? They can’t and won’t and the ECB has to do whatever is necessary and there Germans, Dutch etc suck it up.
Medex Man said:
Just because you cannot envision any other way doesn’t mean everyone else has to go along.
You talk about “greater integration”, completely ignoring that most of the continent didn’t agree to any of this.
I don’t see the eurocrats making the sacrifices they expect the population to have shoved down their throats. It makes the “let them eat cake” comment seem tame by comparison. A group of bureaucrats, with zero democratic legitimacy, sipping brandy and demanding the people who didn’t vote for them accept cuts that the eurocrats won’t accept.
Draghi keeps talking about “doing whatever it takes”. He’s all talk. People who didn’t vote for him are doing what they can, while the arrogant eurocrats make excuses and dumb speeches.
If you can’t envision the peasants building guillotines, you need to wake up. Draghi is making promises he can’t keep even if he were willing to make sacrifices
Jarhead John said:
I have been amazed that worthless pieces of paper(currency)is accepted as payment for goods…Could the entire globe be waking up to this fact? If the euro zone is failing, what does that say about the future of the world’s reserve currency…the dollar.
Basically it will be the last man standing …
Tony Bennett said:
The gold bugs hate this .. but an ounce of benjamins is “worth” more than an ounce of gold.
a little over 28 bills to the ounce.
Until 1933 a $20 gold coin was worth less than 28 $1 bills, at 28 bills to the ounce (roughly correct – I think that older bills might have been a different size).
“A double eagle is a gold coin of the United States with a denomination of $20. (Its gold content of 0.9675 troy oz (30.0926 grams) was worth $20 at the 1849 official price of $20.67/oz.) The coins are made from a 90% gold (0.900 fine = 21.6 kt) and 10% copper alloy and have a total weight of 1.0750 troy ounces (33.4362 grams).”
In 1933, FDR made it illegal to own gold coins in the US unless you were the US government. Today an ounce of gold is worth about $1226, so that $20 coin is worth about $1187, or 59.3 times its face value of $20.
I don’t call these moves as capital flight, but it is the closest thing to. The reason for this is that capital leaving is then covered by the ECB, to which anyone withdrawing capital from Italy will still have the value of that capital determined by the existence of a Target2 account – that is to say that while the Euro and its accounting is intact there is no escape for holders of Euros from its fate. That also means average people are absorbing the cost Europe wide. From another perspective if you like – because the ECB is offering people are accepting, and they ‘just happen’ to choose to invest elsewhere afterwards. Or from another perspective – the domain is Euros, not countries, something similar to investors selling one instrument in the US for another, as long as the move has ‘buyers’ it cannot be deemed as capital flight.
In reality? It is financial engineering, and there would be no surprise in finding that private capital was taking flight out of concern while returning the tab to the national account. It will only be ( part – the reasoning is obscured unless an investor admits) understood as that if the Euro fails, so the citizens of Europe will just have to celebrate having it placed on the sum Euro account for now, ‘saved again and what would we do if the banks or governments had failed, we are of no value without them ‘.
Maybe I misunderstand you, but an Italian moving his deposit from Unicredit to Deutsche Bank will have less of a credit risk (maybe DB is a bad example) and the day the euro is no more he will have a Deutsche Mark deposit. And very important, that deposit is outside his jurisdiction, and less likely to be confiscated.
That would be capital flight – the withdrawal of deposits from a bank or jurisdiction. There is no simple mechanism to replace those deposits in the relevant bank, the bank would have to seek open help to raise capital or have public finance clean up its debt ratios.
What the above article is talking about though is investors deposited in public debt, and in some case corporate ownership. In this case the ECB is openly buying their investment off of them. Hence there is a shuffle of ownership but not net withdrawal from the funds, which have their value held intact. The asset, hence liability on failure, is transferred to the joint Euro ownership which is the ECB , and accounted for as Target 2 claims there… claims the ECB hopes will never actually be demanded by an independent jurisdiction in Eurozone. So you might say capital is leaving Italy, but the real change is that the assets are changing hands outside of Italy ( to the ECB), leaving cash in the pockets of the previous investors ( say German banks). Because there is an element of monetization in the transaction, Target 2 differences will increase.
You can call that capital flight if you wish, or dumping on the ECB, or fraud even, but in the stricter sense it is engineered and accounted for with ‘no explanation necessary – we are saving the project’.
Jon Sellers said:
“claims the ECB hopes will never actually be demanded by an independent jurisdiction in Eurozone.”
The ECB has infinite resources to meet those obligations. So I doubt they are terribly concerned.
Talking real world claims not simply crossing out amount due by a state that has left and won’t fill in the blank – they have no clear means to reclaim, only paper over and bribe, but if Euro dissassembles ECB can just hand each NCB the accounts and say ‘ sort it out beteeen yourselves, and share ECB deficit fairly between yourselves too ‘.
That is to say :
Germany claims and the ECB can only hand it Euros that at that point are only Germany – no good.
“that deposit is outside his jurisdiction, and less likely to be confiscated.”
No reason to think that Italian debts to Germany won’t be paid in part with Italian deposits in German (or other EU) banks. Deposits in British banks may be safer, but you’ll have to make your withdrawals in person and good luck getting passage.
If Euro blows you don’t want to be holding Euro currency, a Euro account, any account in EU. If you think you have to or should for some reason, then don’t expect that the outcome wll be in your favour and just guess which seems the best. My guess is that they would freeze all accounts, impose capital controls and minimum withdrawals, then have everyone’s attention as they sat down to settle accounts and forge out your destiny for you. That is the good scenario.
This is a sort of economic hypothermia – that is Europe going into a deep freeze and blood flowing from the extremities to the core. In this case the extremity being Italy and the core being Germany.
The danger being – if the EU does not take action to get the circulation going again, frostbite will set in and the only option will be amputation.
Tony Bennett said:
“Italy is increasingly dependent on the ECB to hold down bond yields as foreign investors dump Italian bonds like mad.”
Yet yield on Italian 10yr less than US 10yr.
Maybe DJT should replace Janet with Mario.
“But what else do you call it when foreign investors dump Italian bonds to ECB, the buyer of only resort?”
Such folly to purchase Italian debt at 3% yield when the market prices it at 8% yield. Going back to Roman times Italy never failed to repudiate its debt. Eventually the European Central Bank must cover the loss by debasing the Euro or contracting the money supply.
Lower Euro suits Germany that will spin off more surplus to recycle.
I don’t know how this could work out but so long as the German electorate don’t throw a fit, they won’t, it can go on for a mighty long time.
Euro might even fall enough for Southern Europe to attract investment from more foreigners.
Would be no surprise to see this lot survive if they are prepared to bend enough rules.
John k said:
Italy issued debt bought by its banks, then deficit spent the euros. ECB then bought the debt from the banks. Similarly ECB bought old debt from German central bank.
So the debasement or inflation has already occurred, the euros are in circulation. But inflation remains below target while southern eu remains in recession.
recession is because locals are broke, don’t have money to spend, no demand= no hiring, cash sent to northern eu either for imports or to save, in either case leaving locals broke. Local deficits plus net new bank loans too low to replace cash lost to domestic and foreign savers.
Same picture in the us, we lose cash to local savers and separately to foreign savers demanding dollars for their mattress thru trade deficit. Past low growth supported by bank loans plus too low deficit, but net growth in bank loans crashing, growth in deficit too slow to compensate. GDP growth therefore falling, too.
Reblogged this on HISTÓRIA da POLÍTICA.
The ECB must be buying Italian bonds with both hands because yields have been dropping the last 2 weeks. In the broader scope of things, Italian bonds have weakened relative to Spanish bonds.