Why is capital flight from Italy and Spain accelerating?

The European Central Bank has recently published the data of the TARGET2 (Trans-European Automated Real-time Gross settlement Express Transfer) system, which facilitates real time settlement for payments in Euros.

According to data from the ECB, Holland, Finland, Luxemburg, Germany, Cyprus and Estonia are the only creditor countries in the TARGET2 system in the last year, and the other members of the Eurozone are net debtors. The cumulated creditor position of Holland, Finland, Luxemburg and Germany amounted to 985 billion Euros in August 2016, and the debtor position of Greece, Spain, Italy and Portugal amounted to approximately 785 billion.

Whereas in the acute period of the sovereign debt crisis in Europe the markets were worriedly watching the evolution of Greece's negative balance, it is now the time for Italy and Spain.

In august 2016, Italy's negative balance increased at an annual rate of 52.4%, up to 326.9 billion Euros, a new record, and Spain's negative balance increased at an annual rate of 36.5%, to 313.6 billion Euros.

Hans-Werner Sinn, former president of the IFO institute and one of the most respected German economists, has warned since back in 2012 that the TARGET2 system is being used by the ECB "to force the export of capital from countries that make up the core of the Eurozone in order to compensate the capital outflows from countries on the outskirt".

During the same period, a study of the Bank of Holland showed that "negative amounts reflect the capital outflows from vulnerable countries in the Eurozone and thus represent an important indicator of the intensity of the debt crisis in Europe".

To financial analyst Martin Hutchinson, the TARGET2 system and its precursor TARGET have done nothing but prevent "to prevent the starting of some correction mechanisms that would have blocked, or at least slowed down the accumulation of debts for countries with trade and balance of payments deficits".

This is precisely the reason why Mike Shedlock, an analyst at SitkaPacific Capital Management, thinks that "TARGET2 is an abomination created by the founders of the Eurozone and one of its fundamental flaws".

Because TARGET2 also includes transfers of deposits between the banking systems in the Eurozone, as Shedlock further shows, the accelerated increase of Italy's negative balance shows the heavy intensification of the debt crisis in this important pillar of the Eurozone.

In August 2016, the increase was almost 35 billion Euros, after an increase of 43.23 billion in the first seven months of the year, and it is extremely worrisome, especially when investors should be preparing for the recapitalization of the Monte dei Paschi bank.

Newspaper Corriere della Sera recently wrote that "the situation has become a lot more complicated" when it comes to the "rescue" of the biggest bank in the world.

Apparently, potential investors are no longer showing enough interest in the 5 billion Euros increase of the share capital (author's note: an amount about 10 times bigger than the current market capitalization of the bank) nor to the offer to sell some non-performing loans with a face value of approximately 28 billion Euros.

Of course, the official statements intended to "assuage" the markets were not late in appearing, but no one believes them anymore. Pier Carlo Padoan, the Italian economy minister, recently said that "I don't see the need to nationalize troubled banks", according to Reuters.

Even though capital flows have reached a point similar to that of the acute crisis of the sovereign debt, ECB officials continue to state that there is no banking crisis in Europe.

The latest was Ewald Nowotny, member on the Board of Governors of the ECB as Governor of the Bank of Austria, in whose opinion "the situation shouldn't be overdramatized", because "we are in a stage of transition and learning".

"If we are in a learning process, doesn't that mean an admission of the fact that central bankers in the Eurozone don't know what they're doing?", American analyst Martin Armstrong asks on his blog.

And if the European authorities insist on ignoring reality, the analysts of the Bruegel Institute (bruegel.org) expressed the opinion that some preparations are needed for what is coming and have estimated the fiscal costs of the recapitalization of the major banks in the Eurozone.

Based on data from the preceding crises, the individual cost could reach up to 4.5% of the total assets of a financial institution, but there also needs to be taken into account the fact that "a country could be forced to recapitalize up to three of its banks of systemic importance in the case of a severe crisis".

Breugel analysts think that the option of a bail-in cannot be taken into consideration in the case of a bail-in the event of a systemic crisis, and the potential fiscal costs for countries in the Eurozone can vary between 4% - 12% of the GDP.

Yes, the crisis is over, indeed! The ECB is expected to confirm that by continuing its money printing programs, meaning that "we need to prepare for the second part of the sovereign debt crisis, as markets will return to the fundamental aspects of the debts", according to analysts quoted by Zerohedge.

So in other words, they have ignored the existence of bankrupt states in the Eurozone so far? And how much longer should quantitative easing and negative interest rates be extended, so that the "markets" can completely forget about the defaults?

"This time it will be serious", says Bill Blain, executive with financial intermediation firm Mint Partners.

But how much longer can Mario Draghi be serious, in his fight against windmills?