Blog Post

Italy’s capital flight: 2011, 2016, and early 2018

International investors have been repositioning vis-à-vis Italy, after the new government took office in early May. We compare this summer turmoil to previous episodes of capital outflows. Outflows from Italian portfolio investments in May and June have exceeded the outflows recorded during the summer of 2011, and are already halfway to matching the cumulated total outflows recorded during the entire 2011-12 crisis.

By: Date: August 31, 2018 Topic: European Macroeconomics & Governance

The most recent balance-of-payment data from the Bank of Italy show important outflows in the portfolio investments of foreigners in Italy, down by €33 billion in May and €42 billion in June (Table 1). The biggest outflows were recorded on government debt (€25 billion out in May and €33 billion in June), a sign that investors are concerned about the risk that could stem from the new government’s fiscal stance, to be unveiled in the upcoming budget process.

But the banking sector has been affected too. Bank debt has undergone outflows of €6.7 billion in May and €4 billion in June. Down also are foreign equity investments in Italian banks (€2.5 billion in two months) and in the rest of the Italian private sector (€2.9 billion in June). Direct investment – traditionally a more resilient flow – also dropped by €4.3 billion in June, possibly a sign that the scepticism of international investors is not limited to the short term (Table 1).

Other investment liabilities have instead increased in both months – i.e. inflows were recorded. In May, the increase is mostly explained by the central bank’s accounts, whereas June also saw a large inflow into the non-bank private sector, which is attributable to an increase in Italian banks’ recourse to centrally cleared repos.

Table 1 – Capital outflows: flows, BoP financial account, liabilities (EUR bn)

EUR bn May.18 Jun.18
Total Portfolio -33.4 -42.4
of which:
Equity 0.3 -4.1
  Banks -1.3 -1.2
  Others 1.6 -2.9
Debt -33.7 -38.3
  Banks -6.7 -4.0
  General Gov. -24.8 -33.0
 Others -2.2 -1.3
Total Direct Investment 2.1 -4.3
Total Other Investment 46 42.8
Of which:
  Central Bank 37.8 17.3
  Banks 6.6 -2.8
  General Gov. 0 0
  Other 2.3 26.3
  Rest (undistinguished) -0.8 2

 

How does the current situation compare to previous episodes of stress that Italy has been through? Figure 1 shows the portfolio outflows during three episodes: the 2011-12 crisis, when Italy effectively underwent a sudden stop in international private capital flows; the period immediately following the 2016 referendum, which marked the resignation of Prime Minister Renzi; and the available month of summer 2018. The left-hand side of Figure 1 shows monthly outflows during the three episodes.

Three important findings emerge. First, the 2016 episode was really more of an instant scare: after a €31 billion portfolio outflow in December, the next two months saw positive (although small) inflows. Second, although isolated, the December 2016 outflows were larger than any monthly outflows observed between July 2011 (start of the Italian 2011 crisis) and July 2012 (Mario Draghi’s “whatever it takes” speech). Third, the outflows in May and June 2018 were both larger than the 2016 figure, and larger than any of the 2011-12 monthly outflows.

We see this reflected in the cumulative portfolio outflows (Figure 1, right-hand side). In just two months – May and June 2018 – outflows from Italian portfolio investments have exceeded the outflows recorded during the summer of 2011, and are already halfway to matching the cumulated total outflows recorded during the entire 2011-12 crisis.

It has to be noted that in 2011/12 the ECB’s activated its SMP program, which is now terminated. Under the SMP, the Eurosystem bought Italian debt, and to the extent that part of the purchases were operated by foreign central banks, this also had a balance of payment impact. The flows presented here do not take out those purchases, because we do not have monthly data on those operations. Absent the foreign component of SMP operations, however, the 2011/12 flows represented in figure 1 would be larger.

Figure 1 – Portfolio outflows in three Italian crises

Source: BoP data, Central Bank of Italy

Most of the outflows – then as well as now – are accounted for by portfolio government debt, unloaded by foreigners. Bank debt is being unloaded too – now as in 2011-12. But while during the 2011-12 episode international investors at least kept investing in Italian portfolio debt issued by the non-bank private sector, this appears not to have been the case in summer 2018.

Figure 2 – Portfolio and Other Investment Liabilities flows, three crises compared

Source: BoP data, Central Bank of Italy

 

Similarly as they did in 2011-12, the domestic banks have increased their holdings of domestic government debt in response to the foreign outflows (Figure 3). In two months, Italian  banks have increased their holdings of GGBs by €28 billion.

Figure 3 – Italian Banks’ holdings of Italian government debt (EUR bn)

Source: ECB

Overall, the facts presented here will look very familiar to observers of the Italian balance of payments during the euro-area crisis. Italy appears to be on the point of going through a new wave of capital flight, again concentrated on portfolio investment and especially government debt. What should ring an alarm bell, however, is the magnitude of this episode’s outflows compared to the previous 2011-12 episode.

This suggests that investors are getting less and less patient with political risk, and that there is no room for error on the side of the new government. The process to negotiate next year’s budget will be a first and very important test. But if this summer’s episode were to continue, with similarly sized flows, for a prolonged period of time, things could get very serious very quickly.


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

Blog Post

The higher yield on Italian government securities could soon be a burden for the real economy

The increase in the spread between Italian (BTP) and German (Bund) government securities is directly an additional burden for Italy public finance, and thus for tax payers. But it could soon also become a burden for the real economy, as the increased yield on Italian government securities could pull up the cost of bank loans for Italian firms, thus imparting a deflationary impact onto the economy.

By: Francesco Papadia and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: September 10, 2018
Read article Download PDF More on this topic More by this author

Policy Contribution

High public debt in euro-area countries: comparing Belgium and Italy

This Policy Contribution looks at the evolution of public debt in Belgium and Italy since 1990 and uses the debt dynamics equation to explain the contrasting evolution in the two countries in the run-up to the introduction of the euro, during the early years of the euro and since the beginning of the crisis, arguing that the euro could have been used also by Italy to undertake sufficiently large fiscal adjustment.

By: André Sapir Topic: European Macroeconomics & Governance Date: September 6, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: Next steps towards banking and capital markets union in Europe

Bruegel senior fellow Nicolas Véron talks with Jörg Kukies, state secretary at the German finance ministry, about the next steps to the banking union project in Europe, as well as the potential challenges that lie ahead.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 4, 2018
Read article More on this topic More by this author

Opinion

Overcoming the hurdles to Italian Growth

Is the time for refining recommendations and for a serious political debate on how best to overcome bottlenecks and improve the economic prospects of Italians.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 4, 2018
Read article More on this topic More by this author

Blog Post

The Turkish Crisis

Financial markets have been very nervous about Turkey for the past few weeks. We review economists’ opinions about the economic, political and geopolitical risks and opportunities of this situation.

By: Silvia Merler Topic: Global Economics & Governance Date: August 27, 2018
Read article More on this topic More by this author

Blog Post

The great fiscal lever: An Italian economic obsession

In the Italian macroeconomic context, many are convinced that if only we had a large enough fiscal lever, we could set in motion an economy that has stagnated for almost 20 years. But the author argues that the efficiency of Italian (public) investment is currently low. Specific measures can be taken to improve this situation, though, and only once this is done should the public investment lever be used forcefully.

By: Alessio Terzi Topic: European Macroeconomics & Governance Date: August 21, 2018
Read article More on this topic More by this author

Blog Post

Italy's "Dignity Decree"

The new Italian government pushed through its first legislative act including elements of labour market reform. Presented as an overturn of the previous government’s “Jobs Act”, the estimated effects of the decree are controversial. We review Italian economists’ view on the matter.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: July 23, 2018
Read article More on this topic More by this author

Podcast

Podcast

Italy's economic and political outlook

In this week's Sound of Economics, Bruegel affiliate fellow, Silvia Merler, is joined by Marcello Minenna, PhD lecturer at the London Graduate School and Head of Quants at Consob, as well as Lorenzo Codogno, LSE visiting professor, to discuss the Italian government's economic outlook in the European context.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 11, 2018
Read about event More on this topic

Past Event

Past Event

Understanding Italy: challenges and perspectives in the European context

This is an invitation-only workshop to discuss Italy’s economic and political challenges and what lies ahead

Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 11, 2018
Read article More on this topic

Opinion

Making Italy grow again

On March 4th, Italians sent a resounding message in favour of a break with the past. The ultimate test for the new ‘government of change’ will be whether it succeeds where all others have failed over the past two decades: bringing the country back to growth. The authors propose three different actions to revamp Italy’s ailing productivity and gear the country’s productive capacity towards the 21st century: human capital, e-government, and green growth.

By: Simone Tagliapietra, Alessio Terzi and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 26, 2018
Read article More on this topic More by this author

Opinion

« Mieux vaudrait laisser les gouvernements libres de tenter les politiques de leur choix »

Les peuples ont le droit de faire des erreurs: Selon l’économiste Jean Pisani-Ferry, l’Union européenne doit accepter les aspirations légitimes à des politiques disparates, tout se prémunissant contre la contagion de leur corollaire : la possibilité d’une faillite souveraine.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: June 12, 2018
Read article More on this topic More by this author

Blog Post

The Italian mini-BOT debate

Talks of parallel currency are not new in Italy. But one of the proposals – the so called mini-BOT – has made it into the government contract that underpins the current League-M5S coalition. We review what has been said about these proposals.

By: Silvia Merler Topic: Finance & Financial Regulation Date: June 11, 2018
Load more posts