Eurozone: Target2-balances stabilise ahead of Italian referendum - ING

Teunis Brosens, Senior Economist at ING, notes that after steadily widening Target2-imbalances since May 2015, October saw Germany's surplus and Spain's deficit fall somewhat while Italy's deficit rose, but by only very little.

Key Quotes

“Imbalances in the Eurosystem's Target2-system, which reflect claims and liabilities among the Eurozone's central banks, did not widen further in October. In the runup to the Italian referendum, the Italian Target2-deficit did increase further, but only by a modest €1.5bn. Italy does have the highest Target2-deficit the country has ever recorded, although the record deficit (set by Spain at -€434bn in August 2012) is not within reach yet.”

“In terms of national GDP, Greece, Portugal and Spain record bigger deficits than Italy.”

“Unlike in 2012, when Target2-imbalances signaled bank funding stress in southern Europe and a general fear of a Eurozone breakup, today's imbalances are a direct result of Target2. Since February 2015, the Italian Target2-deficit has widened by €191bn. This comes very close to the €188bn in Italian government bonds that the Banca d'Italia has bought since then. Sellers of those bonds invest their funds elsewhere, for example in Germany, leading to a widening deficit in Italy and a surplus in Germany.”

“While this investor behaviour does show that the Eurozone monetary system is still fragmented and risk perceptions for southern Europe remain elevated, it does not show acute stress or capital flight. Which can be considered a reassuring message, a few days ahead of the Italian referendum.”