A post last week suggested that a €37.8 billion fall in Eurosystem lending to the banking system during September reflected a flow of capital back to the periphery in response to the ECB backstopping sovereign bond markets; such a flow eases funding pressures on peripheral banks, reducing their recourse to official support. This suggestion was supported by subsequent September balance sheet data from Banco de Espana and Banca d’Italia, showing declines in lending to banks of €29.5 billion and €3.9 billion respectively.
Eurozone-wide lending has continued to fall so far in October – the ECB’s weekly balance sheet shows a €17.4 billion reduction last week, while this week’s seven-day and one-month repo operations resulted in a net withdrawal of €14.3 billion. A reasonable hypothesis, therefore, is that 1) the Draghi plan has succeeded in attracting funds back to the periphery, 2) this will be reflected in an increase in the money supply in September / October and 3) such an increase will lay the foundation for a stabilisation and recovery in economic activity in early 2013.
Any break in this potentially virtuous circle should be signalled by a renewed rise in ECB lending.