Italy Target2 Imbalance Hits Record €432.5 Billion As Dwindling Trust In Banks Plunges

Authored by Mike Shedlock via,

Contrary to ECB propaganda, Target2 imbalances are a direct result an unsustainable balance of payment system. The imbalances represent both capital flight and debts that can never be paid back. If you think Italy can pay German and other creditors a record €432.5 Billion, you are in Fantasyland.

The interesting aspect of Italy's new record Target2 Imbalance is that it comes just as Dwindling Trust in Italian Banks is on the rise.

Just 16 percent of Italians have confidence in the country’s lenders, down from an already meager 17 percent in June, according to a poll by the SWG research group of Trieste on Friday. Only 24 percent trust the Bank of Italy, plunging from 36 percent in June.


One likely reason: a tortuous bank crisis that caused losses for savers and led the government to rescue three lenders with taxpayers’ money this year. The vanishing confidence is likely to show in campaigns for national elections expected by next spring.


Supporters of the populist Five Star Movement and anti-migrant Northern League have the least confidence in lenders and the Bank of Italy among those with a definite opinion, according to the survey of 1,000 adults conducted Oct. 23-25.

Confidence in Banks Plunges

The eurosceptic Five Star Movement just happens to have the largest share of the vote in recent polls.

Target2 Discussion

Target2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the “Club-Med” countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe.

Pater Tenebrarum at the Acting Man blog provides this easy to understand example: “Spain imports German goods, but no Spanish goods or capital have been acquired by any private party in Germany in return. The only thing that has been ‘acquired’ is an IOU issued by the Spanish commercial bank to the Bank of Spain in return for funding the payment.

This is not the same as an auto loan from a dealer or a bank. In the case of Target2, central banks are guaranteeing the IOU.

Target2 also encompasses people yanking deposits from a bank in their country and parking them in a bank in another country. Greece is a nice example, and the result was capital controls.

If Italy or Greece (any country) were to leave the Eurozone and default on the target2 balance, the rest of the countries would have to make up the default according to their percentage weight in the Eurozone.

Another Look at Capital Flight

It is no coincidence that Target2 imbalances are on the rise as faith in banks collapses. Target2 is a measure of capital flight despite the ECB's assurances to the contrary.



Ghordius Tue, 11/07/2017 - 04:35 Permalink

ho ho ho
"Contrary to ECB propaganda, Target2 imbalances are a direct result an unsustainable balance of payment system."

nice touch, that "ECB propaganda". meanwhile, it's still T2. the least commonly understood statistical device ever invented in central banking

if I buy a house in Spain, then sell it after 20 years, and transfer my profits to a Dutch bank... I increased that "T2 imbalance". it's still... my balance, note. my digital fiat on a bank account. meh

Haus-Targaryen Ghordius Tue, 11/07/2017 - 04:56 Permalink

But in an addition to your balance in a dutch bank account -- the Dutch central bank was forced to lend an equivalent amount back to the Spanish central bank to prevent concentrations of money from developing in certain parts of the eurozone. That 150.000€ you sold your hacienda is not only 150.000€ in your Dutch bank account but also now exists as an Accounts Receivable on the Dutch Central Bank's balance sheet and an Accounts Payable on the Spanish central bank's balance sheet. What happens if Spain leaves the Eurozone and tells everyone with open target2 balances to go sodomize themselves?  Well the Dutch central bank has to completely write off any accounts receivables from Spain to the Netherlands and the Dutch central bank goes insolvent immediately. Who recaps that and with what funds? Target2 being labeled as "sustainable" is pure bullshit and is only remotely accurate so long as no debtor nation leaves.  As soon as a debtor nation leaves, well its game over for the whole thing.  The EMZ is more like a collective financial suicide pact than it is a currency zone. But lets all get around and sing the EU "National" anthem, and the premise it bases all policy on: Its a Small World After AllEDIT: Ghordo, your naïveté is adorable. 

In reply to by Ghordius

philipat Haus-Targaryen Tue, 11/07/2017 - 05:28 Permalink

@H-T. Methinks not naive but targeted propoganda. It has become painfully obvious that he a shill paid by the EU to represent it. Notice that he only posts on any thread related to the EU. Yet as a "retired entrepeneur" I would have thought that, like most regular posters here, his interests would be broader than a single topic. But then, he isn't being paid to comment on other matters I suppose?And he isn't very good with real financial and accountingl issues, other than being able (of course) to quote EU data and statistics. PR/Propoganda doesn't involve much finance and accounting?

In reply to by Haus-Targaryen

Haus-Targaryen philipat Tue, 11/07/2017 - 05:31 Permalink

No, he isn't a paid shill.  I've encountered real EU-shills before, and they're normally dumbed-down Millennials who are willing to work for an apple and an egg for the "benefit of the experiment" or some other nonsense.  They get lists of talking points to which they can respond to criticisms and are very active in specific nations when there is a vote for PR problems.  He isn't a shill, but he is most definitely involved with the EU (and specifically the euro) is some capacity. Back in 2012 -- he gave fucking explicit investment advice to profit on the Greek shitshow that was going on at the time and if you had listed to him you would have made a small fortune. Thereafter all ZH's comments were mass purged never to be seen again. I'd imagine he is some no-name bureaucrat somehow involved in the Euro-Eco System.  He knows how it works and he attempts to defend it from his warped, but often correct view of the world. That being said, he has based his views on defective or incorrect cornerstones and theories and thus his social and economic system he has spent most of his life building and supporting will collapse in his lifetime as he has chosen to ignore reality, but unfortunantly for him he cannot choose to ignore the consequences of ignoring reality. Also his granddaughter(s) (?) are Antifa members, so there is that as well.  

In reply to by philipat

Ghordius Haus-Targaryen Tue, 11/07/2017 - 05:48 Permalink

"Back in 2012 -- he gave fucking explicit investment advice to profit on the Greek shitshow that was going on at the time and if you had listed to him you would have made a small fortune."actually, I was a lender to the Greek gov, and I just explained why I was keeping that position untouched. most here where betting against it, all hoping it would crash, burn, Armageddon stylebureaucrat? still an entrepreneur. why this is so difficult to envision, I don't know"he has based his views on defective or incorrect cornerstones and theories"reality has proven me right, so far. I'm still a hobby historian, hobby archeologist and... a follower of the economic theories of Carl Menger, the founder of the "Austrian School" of economics. the same thinker that gifted us the "Margin Theory", btwI still maintain that if you have a good understanding of Carl Menger's theories, you understand economicsmeanwhile, most people here, even "staunch Austrian School" types, have a lot of Dr. Krugman's faulty theories in their minds

In reply to by Haus-Targaryen

Ghordius philipat Tue, 11/07/2017 - 06:08 Permalink

Carl Menger is not "Ludwig von Mises simplified", noteand the EUR concept has a grounding, a foundation in Austrian School economics (another reason why it's still "working")including that very first item in the ECB's balance sheet assets: goldlet me put it this way: if China forces a return to the Gold Standard... the ECB has all the options ready. by designas a reminder, the EUR was born out of a Shock, conceived out of the aftermath of August 15th, 1971the founding members of this club are the very countries that Nixon "shocked", that day. start from there, if you want to understand

In reply to by philipat

eltxamo philipat Tue, 11/07/2017 - 10:59 Permalink

no-one is returning to the gold standard, but, the individual central banks, they stil exist, pooled part of their reserves to get a exchange rate fixed to the euro, so, in theory that is what backs the whole Target2 thing. if they were ever to leave they will receive their old currency at the same rates after accounting for balances with the Target2. Now, after they are out, it will be up to their own central bank to keep the exchange rate, if they have trade deficits with other countries their new/old currency will depreciate.

In reply to by philipat

Ghordius Joe A Tue, 11/07/2017 - 06:21 Permalink

in a part, yes. it was offset by other gains I made by buying up cheap (only small amounts, mind) so at the end, I do not feel any pangs of "undue, unmoral gains"it was anyway a position I was holding because I was taking care of the estate of a deceased friend, on behalf of his daughter until she was old enough to make her own financial decisionsbut I felt he would have approved to me continuing his strategy. it was sound, it just had to be adapted to the developments. he was Greek, btw, and her husband is my godson

In reply to by Joe A

Ghordius Haus-Targaryen Tue, 11/07/2017 - 05:29 Permalink

"the Dutch central bank was forced to lend an equivalent amount back to the Spanish central bank to prevent concentrations of money from developing in certain parts of the eurozone"this reminds me of a very well written article, lately, that made a difference between truth, lies and... made up bullshitwhat you just wrote... is made up. in my example, no National Bank has to "lend" to another National Bank. it's just a number on the "Target 2" statisticinterestingly, there was a loan similar to what you just described, but between governments. specifically, Italy lent to Spain. but, again, this is completely not in the interest to the narrative that "Mish" is trying to support here in his articlesuit yourself, enjoy your favourite narratives

In reply to by Haus-Targaryen

Haus-Targaryen Ghordius Tue, 11/07/2017 - 05:34 Permalink

So Mr. Ghordo, explain how a wiretransfer from Spain to the Netherlands of 150.000€ results in the Dutch central bank holding a 150.000€ A/R on the Dutch central bank's balance sheet from the Spanish central bank and a 150.000€ A/P on the Spanish central bank's balance sheet to the Dutch central bank. Magic!  European Unity magic.  This system of transfer payments just magically appears for the good of the European Union, European Unity and continued peace and prosperity the continent has enjoyed since 1945. AMIRITE?!

In reply to by Ghordius

Haus-Targaryen philipat Tue, 11/07/2017 - 05:47 Permalink

No, its one of his schticks he does here. Did my two paragraph mockumentary of the Target2 system describe exactly how the system works, even including irrelevant minute details?  No.  Its a very complicated program, in function.  In practice its pretty simple to explain. His "well, but its different" attacks arguments not because what was described is the correct result of the program, but our description of the program doesn't 100% match it in theory.It is akin to saying "Because of gravity, when an apple ripens it falls from the tree to the ground." His response would be something along the lines of "Well not exactly. While gravity does play a role here its a largely irrelevant role here and what is important is soil chemistry. Did you know that if the soil is acidic the apple has less water and thus falls faster than trees where the soil isn't acidic?  See, you are misunderstanding the CAUSE of the apple falling.  It has little to do with gravity and much to do with soil chemistry, which is in turn caused by [blah blah blah].  You have to *THINK* about what is going on here."  His mental gymnastics to avoid the obvious reality that the euro was a horrible mistake and will kill millions of people when it comes apart is simply too emotionally difficult for the poor ol'guy to bare.  Thus, he rejects this as a realistic possibility and warps reality to fit his pre-conceived narrative of EU and euro grandeur. When it does eventually fall apart, I'll feel bad for the guy as reality will come crashing into what he has built in his head. 

In reply to by philipat

gunzeon philipat Tue, 11/07/2017 - 07:01 Permalink

i thought the analogy of a row of shops fits ok too; - start with Germany in the middle of the block, Lidl, Aldi are there - all the way up the end of the street to Greece, a 24x7 Souvlaki shop where cash is preferredWhen the Greek shop goes down the tube he needs to liquidate and sell all to satisfy his creditors, if that's possible, or the creditors take a bath.

In reply to by philipat

Haus-Targaryen Ghordius Tue, 11/07/2017 - 05:54 Permalink

So in the Eurozone, is there a mechanism which prevents concentrations of money in certain nations (and thus nation-specific inflation) at the expense of money supply other nations (and thus nation-specific deflation)? If every depositor in Italy closed their Italian bank accounts and shipped their cash to Germany in German accounts, what would happen from a Target2 perspective?  

In reply to by Ghordius

Ghordius Haus-Targaryen Tue, 11/07/2017 - 06:13 Permalink

an Italian shifting his credit chips to a German bank... it's still an Italian owning that fiat, isn't it?do you make a difference in the US? Californians shifting their chips to NY banks, for example?both the Italian and the Californian still might buy Italian or Californian bonds or stocks, meanwhile. they all tend to invest in what they know betteryes, if all depositors in Italy closed their Italian bank accounts, T2... would rise more. and... that's ituntil Italian banks look better, or give more in return for the pleasure/risk of banking with themit's one of the Freedoms of the EU coupled with... free market, actually. a free and common/single market

In reply to by Haus-Targaryen

philipat Ghordius Tue, 11/07/2017 - 06:27 Permalink

Yes, but the EU transaction has, at present, "crossed a border" as much as Brussels would like that not to be the case in future, so your comparison is flawed. The EU member States still have their own Central Banks and so money flowing into the country from another country, even if in Euros, goes onto the Balance sheet of the country Central bank as a liability, offset in "reserves".

In reply to by Ghordius

BigJim Haus-Targaryen Tue, 11/07/2017 - 07:48 Permalink

 Who recaps that and with what funds?Silly Haus-Targaryen. Mario will pay it!Don't you get it yet? The CBs will just keep buying and paying until the capital misallocation becomes so extreme the entire "capitalist" system collapses in a whirl of hyperinflation.Please note double-quotes around "capitalist". Obviously, the finance/monetary system started transitioning from actual capitalism a long, long time ago.Meanwhile, who writes these headlines? ... as Dwindling Trust In Banks PlungesIs trust dwindling? Is it plunging? Or is dwindling trust plunging, ie, trust is increasing?

In reply to by Haus-Targaryen

GreatUncle Ghordius Tue, 11/07/2017 - 06:27 Permalink

Ghordius, it matters not.All economic systems are so constructed under Keynes that onces the debt becomes so large the deflate the debt game they are all playing requires a NIRP economy to be sustainable.If you cannot achieve growth to satisfy deflating the debt then NIRP is the only real option left.Everybody else can explore what NIRP will means, an economic mechanism with little to no growth to support the debt under Keynes demands NIRP. Target2 imbalances means nothing in the context of a NIRP world.Junk article on that concept all a manipulation of numbers to try and justify one argument over another.

In reply to by Ghordius

philipat Tue, 11/07/2017 - 04:40 Permalink

Yet at the same time, again a result of ECB machinations, Italian Sovereign Debt yields LESS than US Treasuries. Not that anything makes sense any more. I just wish the whole steaming pile would collapse so we can get it over with....

Ghordius philipat Tue, 11/07/2017 - 05:37 Permalink

that "steaming pile" is what Renaissance Italian bankers called... "Monti", i.e. mountains of debtas such, Italians still hold the record in keeping those steaming mountains... "alive". see the oldest bank of the world, the Monte Dei Paschi Di Sienanow, why non-Italians not living in the eurozone (some even living on Bali, on the other side of the world) ought to be cheering for foreign steaming piles to collapse, I don't knowjust wishing for something, anything to collapse? no, I can't say I understand. I often come here for the hope I will, sometimes. it can't be because they are all holding the wrong side of a bet, can it?I also don't see anybody asking for Russian sovereign debt to collapse, here. perhaps one day I'll understand this undercurrent of ZH

In reply to by philipat

philipat Ghordius Tue, 11/07/2017 - 05:52 Permalink

That's because Russia only has 17% or thereabouts Sovereign Debt/GDP, has adequate reserves and is economically self-sufficient so there is no question of collapse? Many of us see through the duplicity of major Central Banks and believe it will end in a financial collpse, esssentially because piling on more debt is not a solution to too much debt. In that context, many wish we could just get it over with so that we can hopefully start afresh with a better system. And the ECB is one of the worst offenders..

In reply to by Ghordius

Ghordius philipat Tue, 11/07/2017 - 05:58 Permalink

phiipat, historically, Russian Imperial sovereign debt was attacked by "shorters" even when it was way lower then thatoh, and defended... by the Rothschilds in London, the dealers and market makers of that debtof course Russian debt could be attacked and even collapse. "small" size, in this matter... does not help. in fact, historically, the best defended "mountains of debt" were the biggest, while the smallest were often among those that crashedI know this is counter-intuitive, but it is... factual. see the Japanese National Debt. unassailable" that we can hopefully start afresh with a better system". ok. but what system, exactly? "any, whatever"?note that gold causes the same kind of steaming mountains.... just harder ones. it's not magic, it's gold. a good thing for saving, note

In reply to by philipat

philipat Ghordius Tue, 11/07/2017 - 06:33 Permalink

As I recall, the RUB has indeed been attacked, quite recently in fact and was very well managed by the Russian CB. In fact, the Russian economy is STILL being attacked via sanctions which hurt nobody but the EU. And again Russia is doing just fine because it is now self-sufficient. So if the EU wants to ignore what had become the largest consumer market in Europe just for the sake of vassalage to Washington, so be it.

In reply to by Ghordius

GreatUncle Ghordius Tue, 11/07/2017 - 06:30 Permalink

The Italians, oh I so remember the lira ... southern mediterranean country that used to devalue its currency to deal with the mountain of debt.Just so happens ... no chance of that happening again is there? I mean it is euro and all.So mountain of debt meets an obstructive mechanism of not being able to devalue itself as it used too and the anger of the population rises. 

In reply to by Ghordius

hooligan2009 Tue, 11/07/2017 - 04:43 Permalink

Target2 is one of the tools of monetary policy, best likened to QE on opiods.The IOU maybe be firsly with the Bank of Spain, but the other side of the ledger is that the Bundesbank holds it, with the ECB as the middle man, setting the interest rate.I conceptualize it more directly - the ECB is guaranteeing all trade deficits via the method of creating debits and credits out of thin air.the central point is true though, neither the ECB nor the PIIGS have any capability or intention of ever paying back the payments to Germany (or Holland).so, this is precisely like the fuel that promoted the Lehmans crisis - rather than leveraging the spreads between bonds, the ECB is leveraging the internal trade imbalances within (the tariff and customs barriers erected by) Europe - which is anti-external trade - thus further promoting PIIGS weak trade position - and so it continues, until like Lehmans, the Germans and dutch (reasonably) expect the return of their money, then "poof" no ECB and no EU - just a northern bloc with more ability to rise from its wreckage.the ECB is the next Lehmans - the PIIGS are being roasted, but the Germans and Dutch are going to go hungry.