Italy Target2 Imbalance Hits Record €432.5 Billion as Dwindling Trust in Banks Plunges

Contrary to ECB propaganda, Target2 imbalances are a direct result of 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.

Mike "Mish" Shedlock

No. 1-10

Free trade in Schengen area. Poor countries can't escape but slaved.


EU is like the "Monopoly" Game we played when we were young. There are 4 players with equal cash when the game start. You have to build money making businesses like houses and hotels. If you don't have that business rounds after rounds then you'll be bankrupt. The same thing in EU. Germany has money making businesses and year after year other EU countries will be bankrupt.


The world is about to witness the first default of CB in a very long time. The ECB already owns 40% of the Eurozone govt debt, and it's not just Italy that owes Germany over $400B. Spain, who's govt and economy is imploding, also owes Germany over $400B. Who believes Germany will be paid back by either of these failed Collectivist States? The counter-party risk is not just with Germany, but with the ECB itself, which of course the ECB will never mention. The ECB is like the low man at the poker table who goes all in from a position of weakness, and I bet the market calls their bluff.
Domestic investors of govt debt are drying up and the risk is moving up the food chain.

The euro was not built on a Utopian theory, as much as trying to find an alternative to the dollar to keep the rising dollar from blowing up the world economy. Unfortunately, politicians do what politicians do - take the politically correct path that has the best chance of getting them reelected. Consolidating the debts of EU members was the heavy lifting that was required if the EU was ever going to have an alternative to the US govt-backed treasury. Bad apples like IL, CT, MA, CA and other Collectivist US states don't spoil conservative states. On the contrary, the more conservative states are more than happy to take the businesses and jobs that flee the basket states (and the elimination of the state taxes deduction has even hit yet). If Obamacare can ever get sacked, and states get block granted, allowing them to pocket the savings gained from reforms, we will see healthcare costs drop like a giant boulder. It only takes one state to start enforcing EXISTING anti-trust laws and requiring prices to be posted, and using the savings to solve their pension problem, for the flood gates of free market capitalism to be blown wide open.


The EU, and the Euro were built on the utopian theory that the most virtuous, most hard working will prevail, and the rest will have to measure up. The reality is quite different: the bad apples spoil the good ones, the good apples never make the bad good.


Shovelling paper with a D10
Nice work if you can get it