Capital Flight in Italy escalates at a record pace. It’s seen in Target2 balances and spreads rather than an EM crisis.

Thanks to Holger Zschaepitz for this set of Tweets.

Silent Capital Flight

#Italy saw record-high capital outflow of €76bn in May-Jun, larger than €51bn outflow in Jun-Jul2011 and €56bn in Feb-Mar2012, Citi has calculated. Foreigners sold €33bn of Italian govt debt & €9.4bn of private sector assets in June. Adds to €33bn sold in May. pic.twitter.com/lLIjBzvk9C

— Holger Zschaepitz (@Schuldensuehner) August 23, 2018

EGB Credit Curve 

Italy Debt Downgrade Coming Up

Italy 10-Year Bond Yield 

Germany 10-Year Bond Yield 

Theory vs. Reality

In theory, there is zero default risk on Eurozone sovereign bonds.

If that was the case, German 10-year bonds and Italian 10-year bonds would have the same yield.

In practice, the bond market says the spread between German and Italian 10-year bonds is 275.5 basis points (2.755 percentage points) and climbing.

For now, capital flight shows up in interest rates, spreads, and Target2 balances rather than a full-blown crisis of some sort. How long this can continue is anyone’s guess.

Risk High and Rising

I discussed this setup twice recently.

Bottom Line

Claims that none of this matters and that there would be no consequences if Italy left the Eurozone and defaulted are more ridiculous as ever.

The harder people attempt to come up with reasons that none of this matters, the sillier they look.

The bond market is talking. Who’s listening?