Aggregate ECB lending to banks, including “emergency liquidity assistance”, fell by a further €9.8 billion last week, lifting the decline during September to €37.8 billion – see chart. Another significant reduction is likely this week, since banks drew down €102.9 billion in today’s seven-day repo operation versus €117.4 billion last week.

The lending fall suggests that capital is starting to flow back to the periphery in response to the ECB backstopping sovereign debt markets via its “outright monetary transactions” programme. A reversal of capital flight eases funding pressures on peripheral banks, allowing them to reduce their borrowing from the ECB. Such an interpretation requires confirmation from September balance sheet data from Banca d’Italia and Banco de Espana due to be released shortly.

The “monetarist” view here is that recessions in peripheral economies are the result of money supply contraction caused by capital outflows and credit weakness. A return of capital could allow monetary growth to resume this autumn, in turn laying the foundations for an economic recovery from spring 2013. Keynesians, of course, claim that no economic revival is possible while fiscal tightening continues and devaluation remains blocked.