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.

The Bond Vigilantes Spared Italy. Why?

I am quite astonished that Italy was mostly left out of the government government debt scare of the past two weeks. Today I even saw a blog post where the “I” in PIGS meant mostly Ireland … Even Paul Krugman initially forgot about how bad our situation is. With public debt above 100% GDP and for over 50% financed by foreign investors, I would argue that we are in a shakier position than Spain. Fortunately our deficit of about 5% range looks austere compared to our other club med fellows.

I just hope those deficit figures are for real. Corruption and waste of public money in Italy look definitely worse than in Spain and Greece. At the same time it is true that the banking system held up quite well and unemployment figures are better than elsewhere, although propped up at least temporarily by government support to redundant workers (“cassa integrazione”). Personally I will not buy Italian government bonds and if there was a way to short them as a retail investor, I would do so.

Errors And Omissions - Take 2

As I previously said, Central Bank of Italy keeps publishing balance of payment reports with error and omissions as large as Italy’s financial account at €26 billion (vs €1 billion last year). Weird-o!

41% Of Italy’s Current Deficit Is Financed By “Errors and Omissions”

Central Bank of Italy released August Balance of Payments (pdf)

Considering the last 12 months rolling, current deficit worsened from €47B a year ago to €53B because exports shrank more (-88B or -16%) than imports (-82B or -14%). Italy’s current account deficit is about 3% of the GDP.

What is interesting is that almost half of that deficit is financed “errors and emissions” … €22B in the last 12 months, €9B in August alone.