Italy's Rapidly Shrinking Money Supply is a Sign of Impending
Recession
Location: Tokyo
Author: Walter
Kurtz
Date: Monday, December 12, 2011
The money supply statistics for Italy continues to be alarming. Ambrose
Evans-Pritchard, who often writes on the issue for the Telegraph had
been ringing the alarm bell about the declining money supply indicators.
The Telegraph: The broad M3 measure tracked closely by the European
Central Bank as an early warning indicator shrank last month by €59bn to
€9.78 trillion, a sign that Europe's long-feared credit squeeze is
underway as banks retrench to meet tougher capital requirements.
Below is a chart form Banca D'Italia showing the three measures of money
supply.
To view the chart,
click here.
The rapid decline in the narrow measure M1 is particularly alarming
because it includes bank deposits. That decline can be caused by
accelerating decline in liquidity for the corporate sector and
individuals, but it can also be the result of new lack of trust in the
Italian banking system. There has been some anecdotal evidence of
Italian citizens pulling their cash from local banks and moving deposits
abroad.
Reuters: A Swiss tax adviser has also noticed a rise in the number
of Italians ready to pack up their bags and move to Switzerland. "It's
pensioners or businessmen who want to get Swiss residency and move their
operations there. I have had more requests to this effect since the
summer than over the past 10 years." In Lugano, a Swiss lakeside town
close to the Italian border, bankers report a shortage of deposit boxes
-- a favourite way for investors to hide their money from the taxman.
What is interesting about the current crisis, though, is that businesses
and individuals are not simply trying to find ways to hide their money
to avoid tax. "The transfers are being made in the light of day, either
to ad-hoc trust companies or in any case by declaring them in the tax
returns," said one Swiss banker.
The decline in M1 may in fact be an indication of a depositor shift away
from Italian institutions. Whatever the reason for the decline, it is
clearly a sign of a serious credit crisis in Italy,
The Telegraph: "This is the first sign of an emerging credit
crunch," said James Nixon from Societe Generale. Banks cut their balance
sheets by €79bn in October, while mortage lending saw the biggest drop
since December 2008.
Italian banks are increasingly becoming reliant on the central bank to
fund themselves. The table below from Banca D'Italia shows a significant
increase in financial institutions' borrowings (over EUR 111 bn) from
the central bank between October and September of this year.
To view the table,
click here.
Such declines in the money supply combined with increasingly
high interest rates would typically be met by an easing of the
monetary policy. However in the case of the euro-zone, the ECB
drives the policy and gives significant weight to the overall money
supply in order to make policy determinations. Therefore the
Italian central bank is at the mercy of the ECB to help ease such tight
monetary conditions. The ECB however, influenced by Germany who is
paranoid about inflation, is not in a
hurry to do so.
If the confidence in the banking system continues to deteriorate, a full
scale run on the banks may be possible. Either way there is no
question that these money supply conditions will lead to a severe
economic contraction in Italy.
Banko Ditalia - Italy Central Bank Statistics
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