October 6, 2017 / 10:37 AM / in 2 months

Italy's Target2 debt hits record high in September

MILAN, Oct 6 (Reuters) - Italy’s debt with the European Central Bank hit a record high in September, data showed on Friday, suggesting cash is flowing out of the euro zone’s third biggest economy.

Its net debt to the ECB’s Target2 payment system, which settles cross-border payments in the euro zone, rose to 432.5 billion euros ($506 billion) in September from 414.2 billion euros in August.

A country’s Target2 position is monitored as a sign of financial stress and imbalances within the euro zone. However, Italy would only need to repay that debt in the event of a break-up of the currency bloc.

Italy’s position worsened during the sovereign debt crisis as foreign investors dumped Italian assets and withdrew funding to its banks.

Analysts say political risks factors as the country heads towards national elections early next year may have dampened foreign demand for Italian assets, but the widening of its Target2 balance since last year has several causes.

The Bank of Italy has identified a growing preference among Italians to cut their domestic government bond holdings to invest more of their savings in higher-yielding foreign assets.

The ECB has blamed the growing imbalances on the massive bond purchases it has been carrying out to boost euro zone inflation, as many of the sellers are foreign institutions.

Also, taking advantage of the ECB’s ultra-expansionary monetary policy, Italian banks have replaced foreign funding with cheap central bank cash. ($1 = 0.8547 euros) (Reporting by Valentina Za and Giulio Piovaccari; editing by John Stonestreet)

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