In the most difficult months of the crisis, worries about keeping accounts had led foreigners to withdraw from the Italian economy. Between 2010 and 2012, net divestments of government bonds had exceeded €110 billion and banks' net foreign funding had fallen by more than €120 billion.
In those years, a profound imbalance had emerged in the Italian balance of payments, despite the fact that the current deficit had started to reduce from the maximum of 3,5% of GDP reached in 2010. To compensate for the lower inflow of resources from abroad, a new equilibrium it had been found by resorting to the loan on the account held by the Bank of Italy at the ECB (TARGET2). Under normal conditions, the balance of this account fluctuates around zero. As of August 2012, the deficit had reached €289 billion.
In recent years, the situation has improved. The current balance became positive, with a surplus that in 2014 approached 2% of GDP. Last year also saw the return of foreigners to Italian securities, with over 50 billion euros invested in public securities and almost 10 in bank bonds. The first months of 2015 confirmed these favorable trends. The return of foreign investment, together with a new balance of the current account, has favored the reduction of the debt position of the Bank of Italy with the ECB. The balance on TARGET2 fell steadily below €200 billion.
The equilibrium values of the years preceding the crisis remain distant. The reasons are different. Part of the answer can be found in the investment choices of Italians. Foreigners have returned to invest in Italy, but Italians have started to look abroad again with greater intensity than in the past. In the first five months of 2015, more than 80 billion euros were transferred out of Italy for portfolio investments, adding to the almost 100 in 2014.
Furthermore, the difficulty that Italy continues to have in attracting foreign direct investments should not be underestimated. A difficulty that is confronted with the tendency of Italians to increasingly increase investments made abroad for the organization of new production activities or for the purchase of controlling shareholdings in foreign companies. In the last seven years, compared to over 160 billion euros of investments abroad by Italians, foreign investments in Italy have stopped at around 60 billion. In the first quarter of 2015, the stock of Italian investments abroad reached 565 billion euro, while that of foreign investments in Italy was less than 420 billion.
The return to a condition of balance in Italian foreign accounts therefore passes not only through the consolidation of the trust of foreigners in our country, but also through a renewed interest of Italians in their economy.
Current account: from a deep deficit to a large surplus
By the early 2002s, Italy's external accounts had begun to show a trend towards a gradual deterioration. The current account balance, given by the difference between receivables (which include amounts collected from abroad for the export of goods or services and for the payment of income from work and capital) and debits (which include amounts transferred to abroad for the same types of operations), had become negative in 0,3. In the following years, an increase in debts greater than that of credits had led to a widening of the deficit, which went from 1,4% of GDP to 2007% % in 2010. The first part of the crisis had seen a further deterioration: a fall in credits greater than that in debts had led to an increase in the deficit, which, in 55, had exceeded 3,5 billion euros, XNUMX% of GDP.
In the second part of the crisis, the situation changed: domestic demand remained weak, while foreign demand began to strengthen. In 2013, the current account balance returned positive, to then record a surplus close to 31 billion in 2014. In just four years, the improvement in the current balance exceeded 85 billion: from a deficit of 3,5% of GDP to a surplus of 1,9%. More than 80% of this improvement is explained by the increase in credits, which grew by more than 15%, against a decrease in debts of just over 2%. This trend continued in the first months of 2015: between January and May, the current surplus approached 9 billion euros, compared to 3,5 in the same period of 2014.
The current account balance of the Italian balance of payments
Looking at the single components of the current account, it clearly emerges how goods explain the main part of this improvement, with the relative balance passing from a deficit exceeding 20 billion euros in 2010 to a surplus close to 50 billion in 2014. In terms of GDP, from a deficit of 1,4% to a surplus of 3,1%, thanks to the drop in imports, the result of the weakening of domestic demand, but above all as a result of the increase in exports. In the first five months of 2015, the balance of goods amounted to 20,7 billion, compared to 16,7 in 2014.
During the last few years, the Italian balance of payments has also benefited from the improvement of the services account. The balance, structurally negative, had stabilized in the first part of the crisis at around 10 billion euro. In 2013 and 2014, a slight surplus was recorded. In the travel sector, the surplus increased from 8,8 billion in 2010 to 12,5 billion in 2014. The slight increase in debts, linked to the expenses of Italians for travel abroad, was more than offset by the growth of credits, with an increase in the disbursement of foreigners in Italy of more than 15% over the last four years, from 29 to over 34 billion.
Direct investments abroad by Italians are increasing
In addition to the current account, which, recording all transactions involving goods, services or income, is normally considered to represent a country's foreign accounts, the balance of payments also consists of the financial account, in which movements of a financial nature, aimed both at making direct investments and at the simple conclusion of portfolio investments or at the transfer of financial resources for operations such as, for example, the granting of loans.
The balance of the financial account is given by the difference between how much Italians invest abroad and how much foreigners invest in Italy. Within the balance of payments, the two balances, the current one and the financial one, are closely connected to each other: a current deficit is generally accompanied by a negative balance of the financial one, the result of the greater inflow of resources from abroad necessary to finance the current imbalance.
The balance of the financial account of the Italian balance of payments
In Italy, for a long time, the financial account recorded a negative balance, as a consequence of the persistent current deficit. At the beginning of the 5s, the financial account deficit, the result of an inflow of capital from abroad greater than the resources transferred abroad by the Italians, amounted to around 90 billion euros. Over the 2010s, the deficit had widened, approaching 5,5 billion in 2013, 50% of GDP. In the last four years, as for the current account, the financial account has also shown an improvement: the balance became positive in 2014, to then exceed XNUMX billion euros in XNUMX. There are different reasons behind this trend, ranging from affect the individual components of the financial account.
Direct investments, for example, generally record a positive balance, representative of the country's difficulty in attracting a volume of investments from abroad capable of compensating those made abroad by Italians. This trend was particularly evident during the crisis. Between 2000 and 2007, Italians had made on average just over €28 billion in direct investment abroad each year, with a peak of nearly €90 billion in 2007. Over the same period, foreign investment in Italy had stalled. just under 26 billion. Since the outbreak of the crisis, both flows have decreased, but with different intensities. Italian investments abroad remained at high levels, with over 20 billion in average investments per year.
Incoming foreign investments, on the other hand, fell below 10 billion, recording, both in 2008 and 2012, even negative values, representative of net disinvestments. In 2014, Italian investments abroad amounted to almost double the foreign ones in Italy. In the last seven years as a whole, against over 160 billion euros of investments made by Italians abroad, foreign investments in Italy have stopped at just over 60 billion. This trend also continued in the first part of this year: between January and May, Italian investments abroad approached 11 billion, while foreign investments in Italy stopped below 5 billion.
Portfolio investments abroad by Italians are growing again
On the other hand, the contribution made by portfolio investments to the composition of the financial account appears to be different. The balance of this item, given by the difference between how much Italians invest abroad, for liquidity management operations not aimed at making direct investments, and how much foreigners invest in Italy, has been structurally negative over the years, with the exclusion of what happened in the two-year period 2010-11. Looking at the trend of the individual items, the effect of the sovereign debt crisis on the investment decisions of both foreigners in Italy and Italians abroad is evident.
Between 2000 and 2009, foreigners invested an average of 65 billion euros of new resources in Italian financial instruments each year. Tensions on the markets have affected investor confidence: between 2010 and 2012, worries about the stability of the country's accounts led to net disinvestments of over 90 billion euros. In recent years, however, there has been a return of confidence, with almost 100 billion of new resources invested in 2014 alone, after the more than 35 of the previous year. The first months of 2015 confirmed this trend, albeit with a slight attenuation compared to what had been recorded in the same period of 2014.
The attention of Italians to portfolio investments abroad has always been less intense than that shown by foreigners to Italian financial assets: between 2000 and 2010, an average of 40 billion euros of new resources were invested each year. In the midst of the crisis, the divestments of foreigners led Italians to make similar choices, also as a consequence of the need to replace the resources that were lacking, with net sales that in the two-year period 2011-12 alone exceeded 90 billion. In the last two years, the return of the markets to normal conditions has led Italians to invest over 100 billion of new resources in foreign assets. Between January and May 2015, Italian purchases abroad accelerated, with more than 80 billion euro earmarked for portfolio investments.
Looking at the portfolio choices of foreigners in Italy, particular attention emerges for long-term debt securities, especially public and bank ones. The investment in shares, on the other hand, is not very relevant. Before the sovereign debt crisis, foreigners invested on average over 30 billion euros of new resources in public securities and about 15 billion in bank bonds every year. Between 2010 and 2013, the exit from the public securities market appeared evident, with overall net disinvestments of over 100 billion. Bank stocks also suffered, losing more than 20 billion. 2014 saw a strong return of foreigners to Italian securities: over 50 billion of new resources were invested in public securities and almost 10 in bank bonds. This renewed attention also continued in the first months of 2015.
The interest of Italians in foreign securities, on the other hand, appears to be concentrated in the sector of long-term debt securities and in that of mutual funds. Over the past fifteen years, Italians have allocated an average of almost 30 billion euros of new resources to foreign mutual funds every year. In the two-year period 2013-14 alone, over 100 were invested, to which another 50 were added in the first five months of 2015. The purchase of foreign long-term debt securities, on the other hand, followed a trend that reflected what happened to the portfolio of Italian securities held by foreign investors. Until 2009 an average of net purchases exceeding 25 billion were recorded each year; between 2010 and 2013, disinvestments reached 150 billion, while in the last year and a half there has been a renewed interest on the part of Italians for this type of investment.
Italy's deficit on TARGET2 remains large
The balance of payments therefore includes all the commercial and financial transactions that a country concludes with the rest of the world. Under normal conditions, commercial movements find a counterpart in financial ones. A current account deficit places the country in the need to find the necessary resources, for example, by financing the deficit with the sale of public securities, private bonds or any other type of financial instrument to foreign subjects. However, if tensions develop in the markets, also the result of a crisis of confidence between the various countries, problems may arise in the transfer of resources, making it difficult to achieve a condition of balance.
In this situation, the solution is found with shifts of resources between the national central banks and the ECB. These movements are represented in the balance of the trans-European payment system (TARGET2). Under normal conditions the balance moves around zero; during the sovereign debt crisis the situation appeared different; today, although there are improvements, we have not yet returned to a normal situation.
Up until the first part of the crisis, despite a large current deficit, Italy managed to find a condition of balance in its external accounts by attracting an adequate flow of resources. Already in 2010, however, some signs of difficulty had emerged, the result of the Greek crisis which was experiencing one of the first moments of tension. Subsequently, the situation has become more complex, leading foreign investors to divest more than 100 billion euros in public bonds in the two-year period 2011-12. The tensions also affected the banking system, with net funding from abroad reduced by more than 120 billion euro in two years.
As a first counterpart to this outflow of resources, between 2011 and 2012, Italians divested almost 100 billion euros of previously purchased foreign securities. The equilibrium within the balance of payments was, however, found by resorting to funding on the account held by the Bank of Italy at the ECB: the balance on TARGET2, on equilibrium levels in previous years, became negative, approaching the 200 billion in December 2011 and then reached the maximum level of 289 billion in August 2012.
The situation then gradually began to improve. Interest in public debt securities has returned, with net purchases exceeding 70 billion euros in the two-year period 2013-14. Foreign investments in Italian private securities started to grow again. The current balance has improved, recording a surplus after years of deficit. However, Italians have started buying foreign bonds again more intensely than before, with outflows that in 2014 alone approached 100 billion. The balance on TARGET2 fell in the second half of 2014 to below 200 billion, remaining, however, at high levels.
The improvement also continued in the first few months of 2015, with constant interest from foreigners in both public and private securities. The banks' net foreign funding was positive, although held back by the possibility of obtaining resources through longer-term refinancing operations with the Bank of Italy. The balance on TARGET2, on the other hand, stabilized around the levels reached previously. Among other things, an outflow of resources for the purchase of foreign securities by Italians continued to weigh, which, in the first five months of the year, exceeded 80 billion, in addition to a volume of direct investments abroad of Italians stably greater than that of foreigners in Italy. A TARGET2 balance around zero, as happened in the years preceding the crisis, therefore remains a long way off.
A net international investment position to watch carefully
All movements recorded in the financial account contribute to determining a country's international investment position, which provides a representation of the stock of foreign assets held by Italians and Italian liabilities held by foreigners. The net international investment position, given by the difference between assets and liabilities, describes the degree of dependence of a country on the rest of the world in finding the financial resources necessary to balance its external accounts and that is why reason one of the parameters considered in the excessive imbalance procedure of the European Commission, with an alert threshold set at 35% of GDP.
Over the last fifteen years, Italy's net international investment position has been consistently negative, as a consequence of the persistent current account deficit, which has placed the country in the position of having to attract capital from abroad. In 2000, the value of foreign assets held by Italians exceeded 1.200 billion euros. Italian liabilities held by foreigners were worth almost 1.300 billion. The net balance of Italy's international investment position was negative by around 90 billion, just over 7% of GDP. In subsequent years, the increase in liabilities was steadily stronger than that in assets.
At the beginning of the crisis, the negative balance had exceeded 400 billion, before approaching 500 billion in 2013, the highest value since the beginning of the 480s. The current account surplus recorded in recent years has favored a reduction in the negative balance of Italy's international investment position, which amounted to almost 2015 billion at the end of the first quarter of 30, a value estimated at just under 2015% of GDP . In March 2.300, the value of foreign assets held by Italians exceeded €2.850 trillion, while that of Italian liabilities held by foreigners approached €120 trillion. In fifteen years, assets have almost doubled, while liabilities have grown by XNUMX%.
The negative net international investment position is the result of different situations between the different components of the accounts. For example, foreign direct investments show a positive balance, mainly the result of what happened during the crisis. Between 2000 and 2007, the stock of direct investments made abroad by Italians grew from 215 to 376 billion euro, a growth rate similar to that of direct investments made in Italy by foreigners, which increased from 164 to 343 billion. During the crisis, Italian investments abroad slowed down, continuing, however, to grow significantly and reaching 565 billion euros in the first quarter of 2015. Foreign investments in Italy, on the other hand, decelerated significantly, stopping below 420 billion.
In nine years, a gap has accumulated between the stock of direct investments made by Italians abroad and that of foreign investments in Italy close to 150 billion, approximately 10% of GDP. Looking at the type of financial instruments used to carry out individual operations, it emerges how Italian investments abroad are concentrated in the sector of unlisted shares, describing a process of productive internationalisation, which has accelerated in response to the difficulties of the crisis.
The situation of portfolio investments, on the other hand, is different, with a constantly negative balance. In the first quarter of 2015, the value of total foreign assets held by Italians in the form of portfolio investments exceeded €1.000 billion, while that of Italian liabilities held by foreigners approached €1.500 billion. Looking at the two portfolios, clear differences emerge. Italians prefer to buy shares in foreign mutual funds, to which they allocate over 500 billion euros. A significant weight is also attributed to corporate bonds, while investments in shares and public debt securities appear to be of little importance. Foreigners, on the other hand, prefer to invest in Italian public bonds, allocating over 860 billion euros to them.
