Blog Post

Italy’s elections had little impact on TARGET2 balances

We documented early signs of improved market sentiment towards struggling euro members in this post at the end of January. Since then, however, European economic data has been mostly disappointing.

By: Date: April 9, 2013 Topic: European Macroeconomics & Governance

Normalization of capital flows to southern Europe remains slow

We documented early signs of improved market sentiment towards struggling euro members in this post at the end of January. Since then, however, European economic data has been mostly disappointing. Additionally, the Italian election’s unclear outcome has increased uncertainty about the policy direction. Therefore, in this post we look if recent turbulence has put a halt on the normalization of euro area capital flows.

A first indicator are the TARGET2 balances that measure the liabilities of national central banks towards the eurosystem (see here for a clarification of TARGET2). These started to decline after Draghi’s famous speech in June 2012.

The convergence towards balance has broadly continued with net liabilities in February 2013 down by 15–29 % in Portugal, Greece, Spain and Ireland compared to June 2012 levels. Interestingly. Italy released data yesterday for March 2013, which is the first full month since its inconclusive elections. Previously, Italy’s TARGET2 liabilities had declined from 274 bn in June 2012 to 228 bn in January 2013, a reduction of 17 %. They then increased again in February to 256 bn. The March data, however, revealed a decrease in net liabilities back to 243 bn. The surprising election result did not therefore seem to increase the reliance of Italian banks on central bank funding. The effects on government bond yields have also been limited. Although the 10-year yield shot up from 4.4 % to 4.9 % immediately after the results were released, it has since decreased back to the pre-election level.

We have also been tracking private capital flows since the piece by Merler and Pisani-Ferry (2012) on sudden stops. This data extends now until 2012Q4 for Ireland and January 2013 for Italy, Spain, Greece and Portugal. Private inflows have rebounded in Italy, Spain and Portugal, where cumulated inflows are now higher than in June 2012. Nevertheless, Greece and Ireland have continued to experience private capital outflows since last June although these seem to have stabilized in recent months.

Our final metric, the share of foreign holdings of southern European sovereign bonds, has been updated only for Ireland and Italy since our last post. In Ireland, the share of non-residents had dropped slightly from 72.6 % in September 2012 to 71.7 % in January 2013.[1] In Italy, foreign holdings dipped from 40.6 % in September 2012 to 39.7 % and then rose slightly to reach 40.3% at the end of the year.

All in all, the data suggests that recent bad economic news have not so far resulted in resurgent capital outflows from southern Europe. Nevertheless, the wider release of early 2013 data could yet overturn this conclusion if sentiment has recently deteriorated, for instance after the clumsy Cyprus rescue. Additionally, future challenges await – especially so in Italy, where the formation of a solid government is still dependent on overcoming many institutional and electoral hurdles. Finally, if analyzed from the opposite direction, the pace of normalization is clearly not fast enough to bring along a speedy recovery.


[1] In February, the share dropped to 55.4 % but this was because the Irish central bank acquired 25 bn in new bonds as part of the promissory note deal. Without it, the non-resident share would have stayed at around 71 %.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Italian economic growth and the Euro

While the Euro has frequently been blamed for the poor growth performance of Italy over the years, a long-term analysis shows deteriorating growth before the introduction of the Euro. Additionally, Italy has shown worse performance than other euro-periphery countries, such as Spain, implying deeper structural reasons for Italy’s economic malaise.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: July 26, 2017
Read article More on this topic More by this author

Blog Post

A tangled tale of bank liquidation in Venice

What can we learn about the Italian banking sector from the decision to liquidate Veneto Banca and Banca Popolare di Vicenza? Silvia Merler sees a tendency for Italy to let politics outweigh economics.

By: Silvia Merler Topic: Finance & Financial Regulation Date: June 26, 2017
Read article More on this topic More by this author

Podcast

Podcast

How will Europe's banking system respond to future challenges?

After the financial crisis, the EU has taken measures to create conditions for a safer banking sector. One of the key measures to do that is the creation of the banking union. How successful has the implementation of the new framework been so far? How will issues in the Italian banking sector be addressed? And how will Brexit change the European banking sector?

By: The Sound of Economics Topic: Finance & Financial Regulation Date: May 5, 2017
Read article More on this topic More by this author

Blog Post

Italian banks: not quiet on the eastern front

Italian banks are back in the spotlight. After MPS failed to raise enough capital from private investors earlier this year, Banco Popolare di Vicenza (BPVI) and Veneto Banca take centre stage. The story of these two banks epitomises the strategy of delayed reform that has been so characteristic of the Italian banking crisis.

By: Silvia Merler Topic: Finance & Financial Regulation Date: March 31, 2017
Read article Download PDF More on this topic

Policy Contribution

How not to create zombie banks: lessons for Italy from Japan

How can Italian banks address the issue of non-perfoming loans? What lessons can they learn from Japan?

By: Christopher Gandrud and Mark Hallerberg Topic: Finance & Financial Regulation Date: March 8, 2017
Read article More on this topic

Blog Post

The Italian Lira: the exchange rate and employment in the ERM

In the decades before Italy joined the Euro, the Lira was devalued many times relative to the Deutschmark. Were these re-alignments accompanied by long term improvements on the labour market? The data suggests this was not the case.

By: Maria Demertzis, Konstantinos Efstathiou and Fabio Matera Topic: European Macroeconomics & Governance Date: January 13, 2017
Read article More on this topic More by this author

Opinion

ECB finally addressing Italian bank woes

Italy’s banking problem has been left unaddressed for too long. Similar to Japan in the 1990s, it is best understood as a combination of structural and cyclical factors.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: January 4, 2017
Read article More on this topic More by this author

Blog Post

The strange case of the MPS capital shortfall

Italy's banking saga continues with the announcement that beleaguered MPS may need to find an additional €3bn. What exactly has changed, and what does it say about ECB decision making?

By: Silvia Merler Topic: Finance & Financial Regulation Date: December 27, 2016
Read article More on this topic More by this author

Blog Post

Socio-economic determinants of the Italian vote

The socio-economic factors driving the 'no' result from Italy's referendum differ from the Brexit vote. The Italian NO vote seems to have been driven by young voters, and mostly related to a sense of economic “malaise”. However, the Brexit vote appears to have been strongly driven by older voters and somewhat less educated ones.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 12, 2016
Read article More on this topic More by this author

Blog Post

Financial implications of the Italian referendum

On Sunday, Italy will held a constitutional referendum whose implications for the political stability of the country are uncertain. Right after the referendum, Italy’s oldest and most troubled bank - Monte dei Paschi di Siena - is expected to complete a very important and sizable capital raise. Here we look at the situation and implications of this critical juncture.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 2, 2016
Read article

Blog Post

Tweeting the Italian referendum: the hashtag war

We are monitoring an aggregate of twitter hashtags in the run up to the Italian Constitutional referendum of 4 December 2016.

By: Giuseppe Porcaro, Henrik Müller and Gerret von Nordheim Topic: European Macroeconomics & Governance Date: November 29, 2016
Read article More on this topic More by this author

Blog Post

The Italian referendum

What’s at stake: on 4 December, Italy will hold a referendum on a proposed constitutional reform approved by Parliament in April. The reform, which was designed in tandem with a new electoral law, aims to overcome Italy’s “perfect bicameralism” by changing the structure and role of the Italian Senate. It also changes the distribution of competences between the state and regions. After the shocks of Brexit and the US election, polls are now drifting towards a defeat of the government’s position in Italy.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 28, 2016
Load more posts