The Elephant In The Room: European Capital (Out)flows And Another €215 Billion In Spanish Deposit Flight

Tyler Durden's picture

Frequent readers know that Citi's Matt King is our favorite analyst from the bailed out firm. Which is why we read his latest just released piece with great interest. And unfortunately for our European readers, if King is right, things in Europe are going to get far worse, before they get better, if at all. Because while one may speculate about political jawboning, the intricacies of summit backstabbing, and other generic nonsense, the one most important topic as discussed lately, is that terminal event that any financial system suffers just before it implodes or is bailed out: full scale bank runs. It is here where King's observations, himself a member of a TBTF bank which would likely be dragged down in any cash outflow avalanche, are most disturbing: "In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks. The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy....Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly significantly accelerate the timescale and increase the amounts of these outflows." That's right: according to Citi there is a distinct likelihood that, all else equal, the domestic bank sector in Spain will see another €215 billion in deposit outflows.

And while Greece has seen a slow and steady bank run over the past 3 years, which has made it far more palatable for the local financial system, King believes that the days of "slow" outflows are now over: "we think the risks are skewed towards larger outflows occurring considerably more rapidly." Now we won't read too much into this, but following up on Jim Cramer's Meet The Press interview from Sunday in which he explicitly predicted bank runs in Europe absent substantial and urgent policy changes, it appears that from a taboo, it has suddenly become all too cool to predict rapid and violent bank deposit flight in any but the priced to perfection scenario. Hopefully Spain is hip with all this sudden "coolness"...

Before we get into the punchline of King's note, here is a terrific summary of all the less than pleasant capital flows out of Europe's periphery.

And now back to the punchline, the first of which is King's all too spot on definition of a "bond vigilante" as not a "wolf" but a "sheep":

The trouble, as we see it, is that bondholders are not at heart the wolf pack Swedish Finance Minister Anders Borg famously made them out to be. Sheep, or perhaps wildebeest, would be a more accurate description.


Bondholders and depositors alike have only limited upside, but lots of downside. They therefore tend to graze quietly upon their coupons or interest payments, relying on others – such as the rating agencies – to warn them of oncoming fundamental risks. Even if individual investors are often very sophisticated, they are constrained by those who set their benchmarks and risk guidelines, which tend to be much slower moving.

... A sheep, however, which once it starts running, gets the herd moving very, very fast:

Once the flock has been disturbed, though, it can run quite quickly. And once it has changed its mind about a given risk, it can be almost impossible to get it to turn back. Those dropping Spain and Italy from their benchmarks, shifting their mandates towards AAA-only, or moving deposits away from peripherals, are very unlikely to return in a hurry. If anything, we think the risk is of acceleration. And it would seem that, having been disturbed once or twice already, investors are proving more alert to potential signs of danger in Spain and Italy than they were in Greece, Ireland and Portugal. Although the threshold for domestic capital flight looks to be higher than that for a retrenchment by foreigners, there is every sign that foreigners are pulling back already.

Which means what in practical terms? Nothing good if you are a Spanish bank, already on the verge of nationalization:

How far is the flock likely to run? In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks (Figure 18). The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy (Figure 19).


Although large, if these flows occur slowly enough, they might not represent a major problem. After all, Portugal’s banks have managed to replace fleeing foreign deposits with domestic ones, and ECB repo should allow a further ramp-up in banks’ holdings of government bonds.


But we think the risks are skewed towards larger outflows occurring considerably more rapidly. Admittedly there are a great many unknowns, including the potential policy response. But none of these estimates allow for the possibility of domestic deposit flight. In the case of a Greek exit from the euro, that outcome seems highly likely. Nor is there any sign that the flight from Ireland and Portugal is diminishing (if anything, we expect the opposite).11 Moreover, banks’ appetite to buy further government bonds may prove limited if they start to suffer deposit flight – and all the more so if they suspect that deposit flight stems in part from their holdings of government bonds

The rest is superfluous: once the run (either bond or bank) starts, there is no stopping it:

Above all, though, we think capital flight, like so much in markets, is a self-reinforcing process. Provided other depositors and bondholders are grazing quietly, there is no reason to run. But as risks come ever more into the spotlight – whether through the TARGET2 imbalances, benchmark shifts or the threat of EMU exit in Greece – the unattractiveness of the risk-reward becomes ever more obvious.

What is the only possible outcome that will prevent this virtually catastrophic outcome?

To our minds, capital flight will stop only once there is decisive policy intervention. The longer investors have to wait for this, the more decisive it will need to be. Even a Euro area-wide deposit guarantee scheme might struggle to be credible if investors fear the incentives for redenomination are strong enough... Quite simply, investors in ‘safe assets’ need to be reasonably sure they will get their money back. Foreign investors in peripherals can no longer be sure of that.

In a continent in which the leaders of the countries can not agree on the summit lunch menu, let along on coordinated and forceful policy intervention, we certainly don't blame said foreign investors.

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falak pema's picture

it proves the spaniards are rich!

cnhedge1's picture

Are concerns over a Greek Euro exit overdone ?

Is the Euro area Credibly on Target?

francis_sawyer's picture

...and in other news, Generalissimo Francisco Franco is still dead!

derek_vineyard's picture

FB down...Liesman fired ????.  There is some sanity?

Jeremy Roenick's picture

And for my next impersonation....  Jesse Owens!



jus_lite_reading's picture

Israel claiming they own all Spanish gold from the Armadas.

bob_dabolina's picture

Why doesn't Germany leave the ez and go back to the marc and then have the rest of the ez issue euro bonds?

It's not perfect, but wouldn't that be the path of least resistance?

Vandelay's picture

How many pesetas would a mercedes cost?

bob_dabolina's picture

I wasn't suggesting Spain leaving the EZ was I?

The EZ would remain intact i.e. euro currency just without Germany. The ez would issue euro bonds and Germany would go back to the marc.

Dick Darlington's picture

Germany, Netherlands and Finland shud abandon the failing euro-project and let the remaining countries to issue all the eurobonds they desire and print their way to prosperity as they see additional debt on top of the debt they can't repay+money printing as "growth".

The Final Countdown's picture

Only a matter of time if you ask me.

Doubleguns's picture

Patience grass hopper, patience.

Psyman's picture

Who should do this?  You named countries, not people.  People make decisions, countries are geographical boundaries separating human populations. 


So the German people should abandon the Euro project?


This implies that Germany is democratic and that the will of the German people means anything to the ruling class.


So the ruling class of Germany should abandon the Euro project?  But that would lessen their power over other human beings and as tyrants they desire such power above all else in life.  So your notion of them giving up that which they desire most of ludicrous.


And thus the Euro project will continue on for many decades.  The only possible dissolution of it all will come as it always has - via war.  But that is unlikely in my life time.

bob_dabolina's picture

lol...what's up? Weren't we just chatting?

OpenThePodBayDoorHAL's picture

every time I see you post I get the urge to say; Zilch!


China Clipper calling Alameda


(you'll only get this if you're over 50...)

TheMonetaryRed's picture

If Santander goes, it's all over. 

falak pema's picture

Florentino Perez can say goodbye to Real MAdrid?

l1b3rty's picture

buy silver, crash The New World Order!

hourglass86's picture

Kick fucking germans out of EZ already! Fuckin nazi scums, 1939 all over again!

Lednbrass's picture

Of course, not wanting to have to pay for the incompetence and stupidity of Southern Europe is just like 1939 all over again- its exactly the same.

Do you have any functional brain cells left at all?

ISEEIT's picture

I am in a foul and dark, ugly mood. I'm pretty much hating EVERYTHING about now. I did find this cute little peice of truth sweet though. Dumb young woman she may be but I still like to be reminded of what optimism was.

I fucking (sort of) hate apple too, but it is a choice.

lotusblue's picture

Curiously MSM (cnbc,albeit a very quick blurb line) beat you to the punch on this Tyler.

Think double espresso will get you back on your game

Tyler Durden's picture

What the MSM, via Dow Jones, reported is the following: "Spanish Banks’ Loan Losses May Be EU218b-EU260b, IIF Says"

Which just happens to be completely different than Citi predicting a quarter trillion bank run.

As for Spanish bad debt... Here is ZH from April 18: This Is The Chart Spooking Europe This Morning

francis_sawyer's picture

I do believe in spooks... I do, I do, I do, I do...

slewie the pi-rat's picture

the nuns in charge will be so proud!

lotusblue's picture

Tyler- are you saying "loan losses" in addition to "quarter trillion bank run"? I think MSM lumped a run into losses-sounds lighter.

slewie the pi-rat's picture

tyler is busy drinking with his moronic "help";  again

so, maybe i can help

imo, were tyler to remain conscious and also give a shit about this, he might say:  "no;  they are two different 'stories' "

or something...

slewie the pi-rat's picture

tyler is doing fine, bio-"logically", lotus_Blu

so i'll take the pop for my bike ride

and you can buy tyler a drink?  L0L!!!

debtor of last resort's picture

You watched cnbc AND bought FB?

bdc63's picture

... he should change his user name to "Kermit the Frog"

monopoly's picture

May I suggest the good Spaniards and other Europeans take their confetti and purchase gold. Quite a bargain at these fire sale prices. Just a thought to all that read here.

francis_sawyer's picture

They 'voted' a long time ago to let their government take care of them (as 'Mericans have too)... This is the result of their careful consideration & foresight...

DosZap's picture


 (as 'Mericans have too)...

Really, when was the vote?,what year,and where were the polling booths?.

All I remember from history, is FDR, and Woodrow, both DeMoNcRats,screwing us all.

As old as I am, I was not even a thought or a warm dribble down my Daddy's leg,he wasn't even my Dad yet.

francis_sawyer's picture

Well, put it this way... No matter who was responsible for the original sin... There has not (on the surface), seemed to be much of an effort to vote them out... (cept for us Ron Paul supporters)...

Dick Darlington's picture

This just out: Spanish Banks’ Loan Losses May Be €218b-260bn, provisioning probably insufficient to cover losses, IIF (major banks' trade body) says: DJ

hugovanderbubble's picture

Banco Totta under huge Troubles in 1-3 yrs Financing Tranch, Asking for Bridge Loan.


Santander gonna be crunched.

timbo_em's picture

Imagine, Juncker, Barroso, Draghi, van Rompuy or Merkel, who have all solved this cirsis more than once, give you a guarantee that your money is save. That's just ridiculous. Nobody trust these people anymore and at the end of the day paper money is all about trust. So, good luck with solving this crisis.

geewhiz190's picture

so once the money is withdrawn, then what? where do they put it? do they keep it in euros? i don't know the answers but  i would like to hear the best guesses or informed obervations-anyone?

ebworthen's picture

Let's say you have 5,000 Euro in the bank.

Greece and/or Spain leave the Euro; re-introduce their own currency devalued to shrink the size of obligations.

Your 5,000 Euros are now worth 2,500 Drachmas or Pesetas (or worse).

Your 5,000 Euros under the mattress or in gold and silver are still worth 5,000 Euros, or 4,000 for a devalued Euro versus 2,500 in your re-introduced currency.

People are getting out from in the front of the runaway devaluation train.

Day_Of_The_Tentacle's picture

Believe it or not, but I think that many people in Europe is still reasonably happy with the Euro. Many are fed up with the democratic deficit of the EU and the central planners almost religious approach to the whole project, but the actual Euro is still somewhat in favour. If the Eurocrats wait too long with the decisive solution though, this may very well change quickly.

My guess is that Germany will not leave the Euro. If Germany steps out, it will mean that the Eurocrats have terminally failed to agree on anything, and the entire project has died.

I think that Greece will have to go, no matter what is planned for the rest of the periphery, because Greece is a powder keg, that cannot be trusted. 

In relation to Portugal, Spain, Italy and France, I believe, what we are seeing is a slow but sure redistribution of assets from foreign hands to domestic hands in each country in order to decrease the impact of contagion, when the dam finally breaks. Further, and I cannot prove this with numbers, but I am guessing that the LTRO was meant to enable the banks to buy sovereign debt, not only from their own sovereigns to keep interest rates under control, but also from exposed banks in other EZ countries again to lower the contagion risk.

Although evidence presented by ZH suggests, that the LTRO funds are stuffed right back into accounts with the ECB, and not invested in bonds, it may still have a desired effect at the point of reset. 

The posting of increasingly bad collateral in the ECB in exchange for pristine liquidity seems insane at first glance, but I am guessing that this is a step towards concentrating the toxic waste on the ECB balance sheet, so that all the collateral, that was not able to hold up during the storm will be seized by the ECB in margin calls, and hence removed from domestic banks.

When the reset happens - and my guess is that the reset will be the announcement of a Med-Euro - the southern domestic banks will be recapitalized by the exchange rate mechanism, the ECB will be left with a gigantic hole on the asset side, which will be filled by a revaluation of gold, and the northern banks will be left with a hole in the balance sheet from exchange rate losses on southern debt. This will prompt stimulus/recapitalization of the northern banks to help fill the hole in the balance sheets, with the added benefit of weakening the northern euro a bit to avoid instant trouble in the export industries.

Result: Southern banks purged some or all bad debt and recapitalized. Northern banks recapitalized. Gold remonetized. Northern Euro strong currency and fiscally prudent. Southern Euro subsequently monetized moderately to stimulate growth and battle unrest from a lower ratio of debt, with big populations who like to spend money on goods produced/marketed by the north, and the northerners will return in droves to their favorite and now-cheaper holiday destinations in the south. When the storm has moved across the pond, the northern and southern euro is loosely pegged, and the EU is still a geopolitical factor on a more solid financial foundation.

Pie-in-the-sky? - probably yes - but hey one is allowed to play around and dream of a less than worst case scenario, right?


Psyman's picture

Germany is not an independent actor.  The opinion of the German people means nothing.  And the opinion of the German political elite means only marginally more than that.

Day_Of_The_Tentacle's picture

Yes, probably more true than I would like to believe for the people of any EU country, not just the Germans. So in your opinion, who ARE calling the shots? And what are they going to do to solve - not just can-kicking - solve the problems?

ebworthen's picture

Bullish for the printing and minting of the Peseta.

sethstorm's picture

The questions eventually become:

To where?

Is the country in question easily knocked over militarily?

kito's picture

when do we get another interview from tyler durden on the worlds state of affairs? its been a while since his last interview with chris martenson.......