Italiay: Target2-deficit unexpectedly shrinks in April - ING

Teunis Brosens, Senior Economist at ING, explains that an €8bn drop in the Italian Target2-deficit is unlikely to herald domestic and foreign investors returning to the country.

Key Quotes

“Banca d’Italia figures today show that the Italian Target2-deficit dropped by €8bn to €411.6bn in April. While a drop in the deficit is very welcome, it seems unlikely that this is an end to the deficit-increasing trend of the past two years.”

“The increase in the Italian Target2-deficit is closely related to monetary policy, in particular to QE (the PSPP or Public Sector Purchase Programme) and the long-term funding made available to banks under the TLTRO. Government bond buying by the Italian central bank (PSPP) has enabled Italian investors to sell their domestic government bonds and to invest abroad instead. PSPP has also enabled foreign investors to offload their Italian government bonds while taking the proceeds elsewhere. Lastly, foreign investors have been selling off Italian bank bonds. Italian banks have in turn increased their reliance on the ECB’s TLTRO funding. All of these financial flows have resulted in an increasing Target2 liability for Banca d’Italia.”

“As QE continues to run, TLTRO-funding isn’t due to be repaid until 2020, and the Italian political and economic situation is unlikely to change until the elections, we expect to see the Italian Target2 deficit increase further in the months ahead.”