Previous posts suggested that capital flowed back into Spain and Italy in September / October following the ECB’s backstopping of sovereign bond markets via the outright monetary transactions (OMT) programme. This suggestion is supported by Banco de Espana and Banca d’Italia balance sheet data for end-October, showing further declines in their Target 2 borrowing of €19.7 billion and €14.0 billion respectively. Outstandings, however, remain huge – a combined €647.2 billion.

The fall in their borrowing of €76.6 billion since end-August must have a counterpart in either a decline in lending into the system by the Bundesbank / other creditor central banks or increased borrowing by other debtors. The Bundesbank’s credit position fell by €56.0 billion in September but rebounded by €23.9 billion in October, according to the University of Osnabruck. Lending into Target 2 by the Finnish central bank, meanwhile, declined by €1.5 billion over the two months. This leaves €43.0 billion yet to be explained. (No other central bank has released end-October data.)

One possibility is that investors pulled money out of France in October in response to the tax-heavy austerity Budget unveiled in late September. (Banque de France Target 2 borrowing was negligible at €2.6 billion at end-September.) Alternatively, the large credit position of the Dutch / Luxembourg central banks may have fallen. It seems unlikely that borrowing by the “bailout three” central banks has risen significantly, given recent sovereign yield spread compression.