The Bundesbank’s net TARGET  2 claim on the Eurosystem – its enforced lending to central banks in weaker Eurozone states – rose by a further €24 billion in August to a record €751 billion. Most of the cash flowed to Spain and Italy – the TARGET 2 deficits of Banco de Espana and Banca d’Italia climbed €11 billion and €10 billion, to €434 billion and €313 billion respectively.

The further rise in TARGET 2 imbalances is disappointing, since a recent stabilisation of ECB lending to the banking system – via standard monetary policy operations or as “emergency liquidity assistance” – had suggested a slowdown in capital outflows from the periphery.

In Spain’s case, banks borrowed only €2 billion more during August but were forced to run down their holdings of cash with the central bank by €6 billion.

Italian banks appear to have fared better last month – they repaid €3 billion of borrowing while increasing their central bank cash holdings by €4 billion. Banca d’Italia, however, required extra TARGET 2 funds to offset a whopping €15 billion withdrawal from government accounts at the central bank, probably related to market financing difficulties.

The hope – not unrealistic – is that the ECB’s bond-buying plan together with an improving economic outlook based on earlier monetary policy easing will stem and eventually reverse capital flight from the periphery, allowing TARGET 2 imbalances to subside. Such a development is needed to signal that the current market rally is more than another temporary period of calm before another “crisis” event.