EuroView: Capital Fleeing Entire Periphery, Not Just Greece
By Jack Duffy
PARIS (MNI) – The start of a bank run in Greece has captured the
headlines, but it may be the run by foreign investors on the entire
periphery that poses the biggest challenge to the Eurozone.
While less visible than a rush by Greeks to withdraw their passbook
savings, a move by non-residents to pull deposits and dump government
bonds in countries like Italy and Spain is gathering pace, according to
official data and analyst reports.
In Italy, foreign investors reduced their holdings of government
bonds by nearly E100 billon, or 12%, in the second half of last year. In
Spain, non-residents dumped E37 billion, or 14%, of their government
bonds between November and February. And by some accounts the pullback
has accelerated as LTRO money has made domestic banks big buyers and
foreigners even bigger sellers.
Richard McGuire, senior strategist at Rabobank, notes that if the
declines continue at their recent pace, international holdings of
Italian government debt will be back to pre-euro era levels by July of
next year. Spain could be back to pre-euro levels by year-end 2013.
The departure of foreign investors “is pushing us toward a make or
break moment” in the Eurozone,” McGuire said. “The only solution to the
crisis is fiscal union of some sort,” he said. “This kind of capital
flight, or de-euroisation, is pushing us away from that.”
Fitch estimates that at the end the first quarter, foreign
investors held just 34% and 32%, respectively, of Spain and Italy’s
public debt, down from more than 60% and around 50% in 2008.
But the capital flight is not just in government bonds. Matt King,
global head of credit products strategy at Citigroup, says that from
their peak bank deposits by foreigners have fallen by 64% in Greece, 55%
in Ireland, 37% in Portugal, 13% in Spain and 34% in Italy.
In a research note, King noted that Italy lost E160 billion in
foreign private capital in 2011, while Spain lost about E100 billion. If
capital outflow reaches the same average level that has occurred in
Greece, Portugal and Ireland, Rome and Madrid could each lose another
E200 billion, he said.
“Capital flight will stop only once there is decisive policy
intervention,” King says. “The longer investors have to wait for this,
the more decisive it will need to be.”
The fact is that investors no longer believe that a Greek euro, or
a Spanish euro, or an Irish euro is the same as a German, Finnish or
Austrian euro. As a consequence, private foreign capital is draining
away from the periphery and being replaced with official capital, mostly
provided by the European Central Bank.
European Union leaders meeting in Brussels on Wednesday promised to
take monetary union “to the next level” but did not agree on any
concrete steps likely to convince foreign investors that the euro is a
safe bet, even in the short term.
Steps to a possible solution could be a pan-European deposit
insurance program to stop deposit flight. Or a more active and flexible
role for Europe’s bailout fund in supporting vulnerable banks. Or
setting a timetable for the issuance of common Eurobonds once the fiscal
compact treaty has been fully ratified.
But bold steps in the Eurozone only happen at moments when leaders
must act to avoid a catastrophe. And while Europe may be approaching
such a moment, it is not there yet.
“We believe that the crisis must get worse before it gets better,”
said McGuire of Rabobank. “It is only when the crisis reaches a certain
point of tension that leaders are driven to look beyond their own narrow
In the meantime, as the threat of bank runs hangs over Greece and
Spain, the flight of foreign capital goes quietly on. With around E900
billion of Italian and Spanish government bonds still in foreign hands,
there could be a lot more selling to come.
(EuroView is an occasional column written by Market News
International editorial staff. Any views expressed are solely those of
–Paris newsroom; 33142715540; firstname.lastname@example.org
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