The BdE released its balance sheet data for December yesterday. There’s a significant drop in Target2 liabilities to €352.4bn (from €376.3bn in November). Overall, since a peak of €428.62bn in August, liabilities have dropped by €76.22bn, reversing private capital flows (mainly driven by the ‘Draghi-OMT effect’). As a result, Spanish banks managed to create a large deposit facility buffer of €44.2bn (from €24bn in November) and also to reduce their recourse to regular refinancing operations by €7.6bn to a total of €357.3bn. Banknotes and deposits of general government were somewhat lower during this month.

Spanish banks don’t seem to regard the current situation as perfectly stable, something evident from the fact that they increased their deposit facility holdings substantially even though excess reserves pay zero interest (and did not opt to pay down more of their borrowing from BdE). This indicates fear of a possible price shock on their main collateral (government bonds) which would increase their margins with BdE and risk current private capital inflows. Nevertheless, the fact that private financial flows have clearly reversed and the current account deficit has been closing and is now less than -€1bn/month makes the Spanish economy a rather ‘closed’ one. Lower money market and deposit rates as well as the large deposit facility buffer will be supportive of government debt auctions in the near future (although it is possible that the Spanish government might take the route taken during the first months of 2012 when the LTRO effect allowed it to auction off more funds than immediately required and increase its deposits at Bde – something that would lower the Spanish banks safety liquidity buffer).