A precondition for lasting respite in the Eurozone crisis is a reversal of capital flight from peripheral economies. This is needed to restart monetary expansion, without which fiscal austerity will ensure continuing recessions.

A return of capital would probably show up initially in a fall in aggregate ECB lending to banks as funding pressures on peripheral institutions eased – aggregate loans can be tracked weekly. It would be confirmed by a decline in TARGET 2 imbalances, i.e. the intra-system credits and debits of national central banks – month-end data are generally available with a one- or two-week lag. Full monetary statistics, published with a one-month lag, would offer definitive proof.

Recent evidence is hopeful but inconclusive. Aggregate ECB loans to banks, incorporating “emergency liquidity assistance”, fell by €19 billion between end-June and end-August but this proved a false signal; subsequent monthly data showed no reduction in peripheral banks’ reliance on ECB funding while TARGET 2 imbalances rose further – see previous post.

Aggregate loans, however, have fallen faster since end- August: they were down by €28 billion as of last week – see chart – while repo lending has contracted by a further €10 billion this week. There is a better chance that TARGET 2 imbalances will have declined during September, although any reduction will be small relative to the prior surge.

Some caution, however, is warranted until these positive hints are confirmed by the full monetary data. An optimistic scenario would involve the six-month change in peripheral real M1 deposits becoming less negative in August and returning to zero or positive territory in September – August numbers are released tomorrow.