On Friday, Bank of Spain released its balance sheet data for June which point to large growth in its lending to domestic credit institutions and target liabilities. More specifically:


MROs increased significantly, from €9.2bn to €45bn while LTROs also posted an increase of a bit less than €5bn, from €315.4bn to €320bn. In total, lending to credit institutions is now €365bn.


The larger growth came from Target2 liabilities, which grew €53.2bn, to €371.8bn (almost 35% of GDP), pointing to a continued capital flight out of Spain. Ever since the second 3Y-LTRO, it’s the first time that Target2 liabilities are more than total bank lending from BdE. Banknotes increased somewhat by €3bn to €70bn, while general government deposits decreased further to only €7.3bn. Coupled with the fact that the deposit facility balance kept falling, with June registering a €27.8bn balance, it is clear that the 3Y-LTRO effect for Spain is now officially over and Spanish banks need to access central bank liquidity (especially short-term through MRO) in order to cover their increased liabilities. Net Other Assets kept their steady decline during 2012, registering at €81.85bn in June.

Actually, if one examines the increased liabilities due to Target2 and banknotes and subtracts new lending from BdE and the drop in the general government accounts, there’s still a bit less than €10bn that was needed to cover outflows, with deposit facility balances being used for that. This could be a sign of banks running out of collateral, especially since the ECB will not accept  government guaranteed bank bonds in its liquidity operations any more. I ‘m not sure that Spanish banks will be able to withstand such volumes of outflows for a long time. Target2 liabilities costs will also make it harder for Spanish banks to make reasonable bids in Spanish government securities auctions since their negatve RoW position plays a role in their cost of funds.

The graph below shows the evolution of both the Target2 liabilities and deposit facility balance since August 2011. The fit of the exponential trendline is quite impressive. Projecting the fit to December 2012 points to a negative balance close to €1.1tr. I think it is clear that the current path is quite unsustainable.