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European Capital Flight (aka Bank Run)?
A few months ago we drew the ire of RBS for suggesting that Greek savers are pulling their deposits out of Greek banks and expatriating assets, in other, less polite words, consummating a bank run. Today we risk that anger again, by taking the very same logic we used logic to the next degree, namely that there could well be a capital flight out of the entire continent of Europe. Some pundits have already suggested this, by looking at March and April TIC data, which however is sufficiently delayed to be irrelevant as the real European festivities only started in May. A far better proxy is the surge in Swiss FX reserves, which took these from 28% to 43% of GDP in one month! Obviously, this was due to intervention actions meant to moderate the rate of increase in the CHF, due to conversion of Euros into Francs as foreigners were depositing tens of billions into the country's banking system. With the EURCHF now back to 1.3743, or a level below all previous interventions, either the SNB has thrown in the towel or, as we wrote yesterday, another round of EUR buying is due any minute. In either case, the underlying problem continues - the broader public is buying CHF and selling EUR in droves, threatening to push the EURCHF to fresh all time lows, certainly signifying a capital flow out of the so-called European core, and into the little country by the alps with lots of cheese, chocolates and bank vaults. Below are Goldman's relatively more moderately noted, but just as troubling, thoughts on the matter.
Is there capital flight out of the Euro zone?
The stunning revelation on June 8 that Swiss FX reserves jumped by almost CHF 80 bn in May – taking FX reserves from 28% to 43% of GDP in one month – raised fears of capital flight from the Euro zone. In the absence of hard data, it is impossible to say what drove this spike in reserve accumulation, but it seems likely that this data point is something of an outlier, driven by short term panic after Germany’s surprise announcement of a short sale ban on May 18.
At a purely conceptual level, the ongoing sovereign crisis on the Euro zone periphery does raise the possibility of capital flight, with Euro zone depositors potentially shifting their savings to safe havens like Switzerland and foreign investors pulling out of Euro zone assets. In today’s daily, we sift through the available data on capital flows out of the Euro zone, looking for signs of capital flight. Because Euro zone data are only available through March and thus pre-date the serious escalation of the Euro zone crisis, we focus on Japanese and US data which are available for April. We examine foreign investor behaviour in this already highly relevant month – European stocks and bonds were already starting to sell off quite hard from mid-April – but caution that they cannot tell us how Euro zone depositors are acting. Moreover, the crisis deepened in May and this may have changed the capital flow picture further.
Data on Japanese and US portfolio flows do not paint a picture of capital flight. This underscores our argument in the most recent FX monthly that the preponderance of evidence points to plain EUR selling – IMM positioning and risk reversals are stretched – while evidence of an underlying asset allocation shift out of EUR is weak. Of course, selling of liquid EUR can predate later asset allocation shifts in less liquid underlying assets, but we see the available data as underpinning our view that EUR/$ has only limited further downside, as embodied in our revised forecast.
2. Japanese investors are not yet penalizing the Euro zone, ...
Data on Japanese outward portfolio flows show that Japanese investors repatriated investments from the Euro zone in April, at roughly the same pace as in the previous 2 months. Overall, however, portfolio outflows from Japan fell back sharply, so this repatriation did not benefit any other country or region. To filter out noise in monthly portfolio flows, we construct 12 month rolling sums to assess the underlying trends. This shows that the 12 month outflow from Japan to the Euro zone has gone from JPY 4.8 tn in Aug-09 to JPY 0.6 tn in Apr-10, a drop of JPY 4.2 tn. Over the same period, the 12 month outflow to the US has fallen from JPY 9.1 tn to JPY 4.8 tn, a drop of JPY 4.4 tn. This does not paint a picture of capital flight from the Euro zone specifically, more of a general scaling back of risk in the face of growing uncertainty.
3. ..., but they are discriminating more among Euro zone assets
Of the JPY 4.2 tn drop in 12 month portfolio outflows to the Euro zone between Aug-09 and Apr-10, around 50% is explained by a reduction in outflows to France, 20% by a decline in flows to the Euro zone periphery (Greece, Ireland, Portugal and Spain), and 13% by a fall in flows to Germany. On a monthly basis, Japanese investors have continued to channel funds into German assets, while they have been selling French and periphery assets. There is thus clear evidence of greater differentiation among Euro zone countries, benefitting primarily Germany, though we should note that the sharp reduction in flows to France could be a reflection of liquidity, with Japanese investors better able to sell assets in the core than on the periphery. As always, bond related flows dominated Japanese portfolio data. Equity flows to the Euro zone have ground to a halt on a 12 month basis, a possible indication of a re-rating of the growth outlook in the Euro zone.
4. Meanwhile, US investors are still buying Euro zone assets
The April Treasury International Capital (TIC) report, which summarizes portfolio flows into and out of the US, paints a completely different picture. It suggests that net portfolio flows from the US into Euro zone stocks and bonds are still substantial, to the tune of $16 bn in April, which is roughly the same order of magnitude as prior to the global financial crisis in early 2007, so a very healthy pace of buying. Moreover, net flows into the Euro zone periphery were strong in April (around $5 bn), and they were positive for France ($2 bn), while flows to Germany were negative (-$2 bn). In essence, there is little evidence of a crisis of confidence among US investors in the Euro zone – at least in April.
5. No sign of portfolio allocation away from the Euro, yet
Overall, the picture is not one of foreign investors making a portfolio allocation away from Euro zone assets, and we re-emphasize that European stock and bond markets were already selling off quite hard from mid-April. This underscores our underlying view that investors will continue to hold their short Euro hedges for a while, but not re-allocate the actual assets much, which is implicitly what underpins our stronger EUR/$ forecast on a 12 month basis. That said, as May’s dramatic jump in Swiss FX reserves showed, the situation remains fluid and room for policy mistakes ample. We will continue to watch for changes in the data, most obviously in next week’s BoP release for the Euro zone.
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paper >> paper !!!
(uproarious laughter!!!!)
caution: be not where the lemmings are when the lemmings see the cliff edge.
mehhhh where's the cliff
Did someone forget to turn on their SPARC? SPY down .5-.6% and SDS trading up slightly to negative. Maybe I am missing something?
SPY QQQQ DIA are EX DIV today, that is the discepancy.
As I understand it the little country by the alps no longer has gold in its vaults, or cheese or chocolate but merely paper.
Your right, they sold more than 1300 tonnes of the yellow metal from 1990-2005 which includes 130 tonnes sold during the 2004-2009 Washington Agreement.The fools are parking their cash with the SNB are oblivious to fact it is the same paper with a different name as the Central Bankers attempt to push it down their throats even deeper.
Correct again,although in this case its chocolate coated cheesy EURO paper......soft from the outside even softer on the inside!
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Well I wish they'd get on with it! I'm 4 points down in two weeks! I'm going to start betting against ZH prognosticastrators!
Keep a clear head.
ZHers in general want to bring about some sort of financial reorganisation - none more so than Tyler who set the site up with that in mind.
I don't think they're wrong at all, just don't get caught up in the timescales implied. They're part of the design to bring events forward.
Some EU countries need a strong Euro and some need a much weaker Euro, This is well known but what isnt known is how this will pan out over the longterm, Its not rocket science assuming the Euro will fall or the breakup of the EC is a strong possibility hence the smart money may be moving, I dont know whats safe but the gold price indicates some is going there, The US treasuries look well bid up so clearly some is going in t bills Spain looks like a sure Greece 2.0 and for me Germany is hardly safe.
I have no Euro exposure but if I did I wouldnt very soon after writing this.