Bank of Spain released its balance sheet for May today. The basic observations are as follows:

  • Target2 liabilities continued to increase growing to €318.6bn, a change of €34bn in a month. On the other hand, the deposit facility dropped further to €36.8bn.
  • Lending from the ECB increased in May through the MROs (which closed at €9.2bn compared to €1.8bn in April) while the LTRO remained unchanged.
  • Government deposits dropped from their high level of €24bn to €11.2bn.

Overall it is clear that capital flight is steady at around €30bn/month. Spanish banks excess liquidity (acquired through the 3Y-LTROs) has dropped to alarming levels, while the MRO borrowing shows that the banking system is already facing liquidity problems. Furthermore, the government deposit position is now low and cannot function as a balancing factor.

If this level of capital flight continues in June as well, Spanish banks will need to use short-term MRO lending from the ECB to cover the liquidity leakage. Bank of Spain daily interbank rate statistics point to very limited and expensive (especially compared to eurepo rates) access to interbank lending and only in very short maturities (overnight for unsecured lending, one month for repo loans). The recent increases in MRO usage visible in ECB’s weekly statements might be a result of Spanish banks lending.

As far as the Spanish banking system is concerned, a third 3Y-LTRO is quite needed by now.

On the Italian front, Bank of Italy released data on Italian debt. Table 5 contains details of holdings of securities by sector:

Although the data does not contain the most recent monthly details for all categories it is quite evident that, especially after the 3Y-LTROs, domestic MFIs were the main buyers of government securities, coupled with other financial (Other residents did the same in the second half of 2011). On the other hand non residents continued their exodus from Italian debt which amounted to €95.8bn during 2011 and another €24.6bn in the start of 2012.

Unfortunately, data for non residents only reaches February but an extrapolation clearly shows that resident MFIs/financials probably only managed to match outflows from non residents. Judging from the recent increase in Italian yields they aren’t successful any more.

Overall, the data point to a stressed environment but they aren’t recent enough to draw clear conclusions.

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