Tito's Blog

Central Bank Of Italy Watch

As I previously pointed out, balance of payments issued by Central Bank of Italy (english) had massive amounts reported under “errors and omissions”. I could not find any mention of this topic on the internet or in the national press, please comment below if you find any relevant article.

I am closely following these monthly reports because I am curious to see the impact of the “capital repatriation” act (“scudo fiscale” or “tax shield”) that allowed an alleged €100 billion (or nearly 7% of GDP) held in tax havens accounts to be regularized no-questions-asked by simply paying a 5% capital duty. The Central Bank writes:

The bringing to light of unreported capital held abroad as a consequence of the “capital repatriation and regularization scheme” will lead, judging by the experience of the two analogous schemes at the beginning of the decade, to an as-yet-unquantifiable upward revision of residents’ assets held abroad.

In the first 11 months of 2009, Italy had a current account deficit of €54 billion, financed by €12 billion capital inflow (the “financial account” in IMF balance of payment accounting parlance) and a stunning €42 billion accounted for in “errors and omissions”. Since that figure is simply a plug to make the balance of payment balance, those €42 billion came from nowhere.

Looking at November 2009 figures, the balance of payment gives an even more puzzling picture. Both current account and financial account were in negative territory by €4.6 billion and €15.8 billion respectively. The €20 billion that fled the country in a single month came from, you guessed it, “errors and omissions”. Most of the outflow was due to “hot money” leaving the country, i.e. Italians investing abroad (€8 billion) and non-Italians selling their holdings in Italian shares and bonds at a reckless pace of €33 billion in just one month.

I wonder if the surge of “errors and omissions” comes from funds accumulated in the Italian “shadow economy” (25%-30% of GDP yearly) that are now emerging or something else. In the latest report issued in January 2010 (pdf, english), the Central Bank reported that it is shifting to a new, more accurate reporting system, causing an upward adjustment of Italian external debt by €140 billion or 9% GDP.

On the liabilities side (equities and bonds issued by residents and held by non-residents) the new system produced stocks that were significantly larger than those published previously. At the end of 2008 liabilities towards non-residents consisting of debt securities amounted to €1,036.7 billion under the new system, against €988.5 billion under the old system; those consisting of equities and investment funds amounted to €133.7 billion under the new system, against €24.3 billion under the old system (Table 1). The gap reflects the imperfections of the method of compiling the statistics under which the data where obtained by summing the flows and adding the valuation adjustments, which gave rise to a systematic distortion over time.
[…]
According to the new data, Italy’s net foreign debtor position at the end of 2008 is about €140 billion higher (equal to 9 per cent of GDP).

Unfortunately for conspiracy theorists, the change of net external debt was actually concentrated in the private sector:

In the case of debt securities a change was also found in the distribution by issuing sector. Under the new system the foreign liabilities of general government were smaller and those of banks and the other sectors were larger, which brought the Italian data closer into line with those of the other main advanced countries.