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From An Orderly EUR Decline To A Capital Flight Crisis In 4 Easy Steps
Lower growth expectations and higher risk premia on peripheral European assets have weighed heavily on the EUR since the sovereign crisis began in late 2009. But, as Goldman's FX anti-guru Thomas Stolper notes, we have not seen evidence of a net capital flight crisis out of the Euro area that would have led to disruptive EUR depreciation (yet). Much of the reasoning for the relative stability is the Target 2 system and the high degree of capital mobility in European capital markets which have enabled the rise in risk aversion to be expressed by internal flows (as well as repatriation). With this weekend's election (and retail FX brokers starting to panic), it is clear that the interruption of these internal channels may well lead to a disorderly capital flight and a full-fledged crisis in flows. Stolper outlines four potential catalysts to trigger this chaos (which is not his base-case 'muddle-through' scenario) as we already noted the huge divergence between implied vols and realized vols indicate the market is starting to price in more extreme scenarios and safe-havens (swissy) are bid.
Thomas Stolper, Goldman Sachs - What Could Turn an Orderly EUR Decline into a Capital Flight Crisis?
Euro Decline Has Been Orderly So Far...
as vol seems well-controlled, yet as we have pointed out earlier, implied vol (forward expectations of volatility) is rising very notably.
Thanks to ECB Facilities /Financial Market Integration
To understand the ‘orderly’ nature of the EUR sell-off so far, we need to look at the underlying mechanics of the EUR decline. An escalation in country risk tends to lead to higher risk aversion by both local and domestic investors.
At a first level, risk aversion is expressed by a search for ‘safety’ in cash, cash equivalents or short-term government bonds within the economy.
At a second level, risk aversion is expressed by capital leaving the country on a mass scale and within a short time-frame. It is this second level of escalation to risk aversion that is associated with a capital flight crisis.
In the Euro area context, the existence of the Target 2 facilities and the integration of Euro area financial markets has helped avoid disruptive capital flight from the region by allowing investors across the region to buy government securities issued by core Euro area countries deemed to be safer. Target 2 accommodates large-scale cash outflows from the banking system of peripheral countries to that of core countries. Financial market integration (very few controls or taxation on capital mobility) allows investors to turn their portfolios around rapidly in order to hold government securities in those countries considered ‘safe havens’ within the EMU.
Assuming that a disruptive capital flight crisis were associated with a high demand for physical cash, it is interesting to observe that we have seen no evidence of such developments in data linked to currency in circulation by the ECB (see Chart below).
The existence of ECB facilities and the integration of Euro area financial markets is a necessary, but not sufficient, condition to avoid capital flight from the region. The fact that investors can easily shift their capital within the Euro area does not mean that they will.
However, for local investors, shifting to a foreign currency involves additional risk-taking. Private investors need to be willing to take currency risk on their savings at a time of high uncertainty and risk aversion. Institutional investors are often not even mandated to take currency risk. For individual investors, the cost of converting Euros into foreign currency can be very high—and holding EUR notes may be a viable alternative for residents in peripheral countries.
As for foreign investors, they may choose to return to their base currency. But the impact from their capital flight has so far been offset by local investors repatriating capital back into the Euro area, as we have discussed in the past.
In essence, the Euro area balance of payments remains remarkably balanced compared with most other regions and countries. Moreover, even in periods of extreme stress in peripheral countries, it is not obvious that capital flight out of the Euro area will materialise in a substantial way.
Disrupting Internal Flows Could Trigger a Euro Capital Flight Crisis
At the extreme, and in the absence of a legislated true European risk-free asset, a capital flight crisis could hypothetically occur, if investors start doubting that any placement in cash or government bonds can guarantee them a return of their placement in Euros.
Barring that very extreme and highly unlikely outcome, it becomes clear from the analysis above that a EUR capital flight crisis can be triggered only if the avenues of internal capital mobility within the EMU are somehow disrupted.
So what could cause such a disruption? In principle, it could be a situation or a policy initiative that either incentivises or forces people to seek a safe return of (rather than on) their principal in a jurisdiction outside the EMU, despite the considerable FX risks involved.
Some examples we can contemplate are:
- Invalidation of the ECB’s Target 2 facilities would interrupt the (so far unlimited) capacity to shift cash within the European banking system. Even a signal that such a development could occur (upon certain conditions) in just one country in the EMU could potentially lead to a large-scale flight of deposits from the Euro area.
- Capital controls within Europe, and legislated barriers to capital transfers within European financial markets, would have a similar impact.
- Taxation by core countries on capital inflows is sometimes viewed as a disincentive for capital to migrate from the periphery to the core. Should it be applied on a large scale, it could make the relative risk-reward of assuming currency risk to safeguard return of principal more appealing.
- Negative yields on core European fixed income. It is possible to envisage that, at times of extreme tensions, nominal yields for core European bonds could decline below zero as investors could decide to pay a premium for ‘insurance’ on their capital. Sufficiently negative yields could also increase the risk-reward for local investors to assume currency risk.
This is not an exclusive list of triggers for a capital fight crisis in the Euro area. Nor are all of these examples equivalent in terms of their impact (for example, Target 2 disruptions could cause much more tension than return disincentives). But it helps illustrate the types of outcome that have the potential to derail the current Euro area investor/depositor rational bias to remain EMU-based.
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EASY? just like the " Rock of Gibraltar"?
this is it, Y/C!
the perfect chance to fade stolper!
the EUR is ging to 140
NICK CAVE AND THE BAD SEEDS - ROCK OF GIBRALTAR
http://youtu.be/A4o4Cditrb8
Stolper is the last thing on my mind! That cock-A-roach.
Hmmmm... question. I'm skeptical of Chart 6. How far into 2012 does it go? Massive bank runs from banks in Spain and Greece, and not even a blip on the chart? Or am I reading it wrong?
I'm a trader. This guy can give you some advice. q99x2 /sarc
You show up everywhere, with nothing to submit? Who are you douche bag?
Rig the weekends elections and everything will work out fine.
Who's gonna win?
http://www.zerohedge.com/news/syriza-takes-advantage-spanish-bailout-boo...
not who yu've been told.
Italy's Unicredit derived 30% of overall profits from the Turkish subsidiary...but Turkey represents only 7% of revenues for the bank. It's Yapi Kredi unit is opening new branches left n right....whaz goin on here?;;
massive outflows of capital from the Euro sector of the Euro-merikan prison zone...sure the Greeks are goin at it big time, but don't think the so-called "core" countries' citizens are far behind...they know....the imperial armies are floodin out of europistan in disarray, and the columns of stragglers draggin their loot will be a soon nuff pitiful progression that attracts the jackals n wolves what always sniff out easy prey. best to pray?
it's the piper to pay \time...brother, can yu spare a guilder> we be - witched, bothered, n wildered!
the $ flooding east right now will soon nuff become a tidal wave of capital...Russia, Turkey, n irony of ironies...Iran are going to be the winners....and Constantinople at the center of it all....once agin!
Once any sizable part if the worlds population realizes that each of wizzards behind the curtain are self serving fools capital flight will be the general disorder. However, in the final analysis there is no where for capital to hide from its destruction when much of it is an illusion. Then what?????
It's like monopoly; when you realize the banker has been cheating. You throw the game board over and go play outside. Maybe kicki him in the gut as you storm off.
The intended target of your kick is too high.
All (electronic) Euros ultimately exist only on the books of the ECB. They can't go anywhere. The price of the Euro can change relative to other currencies, but somebody has to hold all those Euros. So even if Europeans make a mad scramble for gold coins, the number of Euros in circulation cannot change.
And if the price of the Euro drops significantly, that in itself could help save the Eurozone from Depression by making them more competitive.
Precious Metals!!!
TROIKA covert art of war derail-the-enemy pitiful crapola
from wires:
Leftist Syriza Party seen down large in recent secret poll.
Last gasp of the morons (i.e EU).
Can't post the link you ass-wipes...
go pay for a subscription.
market chaos t-minus and counting.
Great point chump666 Where in the Hell is Troika>
F..king fantasy delegation commitee!
Yeah, I saw those "secret wires" too...
http://www.youtube.com/watch?v=xuFSWcNe8hY
Well la-de-fucking-dah, more Stoppplered FX Horseshit on Thursday afternoon, to boot.
Made my day.
I give up.
Gonna go watch World's Dumbest Brokers on TruTV.
Followed by a 1 hour special Amazing Shit Said to Peddle Worthless Securities on the Discovery Channel.
And tomorrow just after watching Michelson fire another 26 over par, they're gonna have a special on the Food Network; Mother's Downhome Vegan Zombie Apocalypse Casserole Cookbook.
Nothin' like a Good Old Devaluation and Currency War over Father's Day Weekend.
Fuckin'-A
Oh, and I forgot, there's a PBS special on Sunday in place of Masterpiece Theater about Goldman called Muppets Up the Arse.
The AUDUSD is set for an upcoming big reversal very soon. www.marketoverflow.com
Wave 5 on the realized volitility chart perhaps.
Might affect confidence elsewhere if they had a lot riding on it.
For a bigger-picture perspecitve on how this whole thing is going to play out, check out Dani Rodrik's latest blog entry, appropriately titled 'The End of World As We Know It':
Consider the following scenario. After a victory by the left-wing Syriza party, Greece’s new government announces that it wants to renegotiate the terms of its agreement with the International Monetary Fund and the European Union. German Chancellor Angela Merkel sticks to her guns and says that Greece must abide by the existing conditions.
Fearing that a financial collapse is imminent, Greek depositors rush for the exit. This time, the European Central Bank refuses to come to the rescue and Greek banks are starved of cash. The Greek government institutes capital controls and is ultimately forced to issue drachmas in order to supply domestic liquidity.
With Greece out of the eurozone, all eyes turn to Spain. Germany and others are at first adamant that they will do whatever it takes to prevent a similar bank run there. The Spanish government announces additional fiscal cuts and structural reforms. Bolstered by funds from the European Stability Mechanism, Spain remains financially afloat for several months.
But the Spanish economy continues to deteriorate and unemployment heads towards 30%. Violent protests against Prime Minister Mariano Rajoy’s austerity measures lead him to call for a referendum. His government fails to get the necessary support from voters and resigns, throwing the country into full-blown political chaos. Merkel cuts off further support for Spain, saying that hard-working German taxpayers have already done enough. A Spanish bank run, financial crash, and euro exit follow in short order.
In a hastily arranged mini-summit, Germany, Finland, Austria, and the Netherlands announce that they will not renounce the euro as their joint currency. This only increases financial pressure on France, Italy, and the other members. As the reality of the partial dissolution of the eurozone sinks in, the financial meltdown spreads from Europe to the United States and Asia.
Our scenario continues in China, where the leadership faces a crisis of its own. The economy’s slowdown has already exacerbated social conflict, and recent developments in Europe have added fuel to the fire. With European export orders canceled en masse, Chinese factories are faced with the prospect of massive layoffs. Demonstrations begin in major cities, calling for an end to corruption among party officials.
China’s government decides that it cannot risk further strife and announces a package of measures to boost economic growth and prevent layoffs, including direct financial support for exporters and intervention in the currency markets to weaken the renminbi.
In the US, President Mitt Romney has just taken office, following a hard-fought campaign in which he derided Barack Obama for being too soft on China’s economic policies. The combination of financial contagion from Europe, which has already led to a severe credit crunch, and a sudden flood of low-priced imports from China leaves the Romney administration in a bind. Against the advice of his economic advisers, he announces across-the-board import duties on Chinese exports. His Tea Party backers, who were critical in mobilizing electoral support for him, urge him to go further and withdraw from the World Trade Organization.
Over the next few years, the world economy slumps into what future historians will call the Second Great Depression. Unemployment rises to record-high levels. Governments without fiscal resources are left with little option but to respond in ways that will only exacerbate problems for other countries: trade protection and competitive exchange-rate depreciation. As countries sink into economic autarky, repeated global economic summits yield few results beyond empty promises of cooperation.
Few countries are spared the economic carnage. Those that do relatively well share three characteristics: low levels of public debt, limited dependence on exports or capital flows, and robust democratic institutions. So Brazil and India are relative havens, even though their growth prospects are severely diminished as well.
As in the Great Depression, the political consequences are more serious and hold longer-term significance. The eurozone’s collapse (and, for all practical purposes, that of the EU itself) forces a major realignment of European politics. France and Germany compete openly as alternative centers of influence vis-à-vis the smaller European states. Centrist parties pay the price for their support of the European integration project, and are repudiated in the polls by parties of the extreme right or extreme left. Nativist governments begin to kick out immigrants.
For nearby countries, Europe no longer shines as a beacon of democracy. The Arab Middle East takes a decisive turn towards authoritarian Islamic states. In Asia, economic strife between the US and China spills over into military conflict, with increasingly frequent naval clashes in the South China Sea threatening to erupt into a full-scale war.
Many years later, Merkel, who has withdrawn from politics and become a recluse, is asked whether she thinks that she should have done anything differently during the euro crisis. Unfortunately, her answer comes too late to change the course of history.
A remote scenario? Perhaps, but not remote enough.
http://www.project-syndicate.org/commentary/the-end-of-the-world-as-we-know-it
And this is why Syriza 'won't' win Sunday's election.
I don't think it matters whether Syriza win or not on Sunday. Some variation of this scenario is still destined to play out over the next few years regardless of what political party presides over the impending collapse into chaos of Greece (followed thereafter by the rest of the EZ). This goose is cooked.
But where's the part of the story where an international currency is set up and its acceptance is forced upon all people? I think the elitists will be able to spin the linking of the fate of most countries into some sort of necessity for stability. It's for the children, don't you know?
And your scenario is why Germany will be the first to exit the Euro, not Greece.
The longer Germany waits, the greater # of Euros they are owed on TARGET2. Germany is already owed a trillion. Once the Eurozone collapses, these settlement system debts will never be paid. Ze Germans need to get out now.
Plumple
I doubt Romney would go that route. As a Mormon he must know all too well the failings of another LDS Congressman Smoot of Smoot Hawley fame. I doubt he would not remember the lessons of that trade war tariff. I would bet his beef with China is largely for the masses and he, like Timmah, knows the Chinese are only doing what every other country on the planet is trying to and that is win a currency war.
We got some large (selling) boo-coo movements on the Asian indxes, FMD...
Krugman you nut, your creditors (Asia) are freaking out, hence America the debtor from hell is about to get slammed.
F*ck the Fed and every other CB.
Yeah but he doesn't mention that Goldman's domestic or international deposit base is at risk now does he..... Oh wait.
No demand for physical cash? Are you serious?
Nancy the earnest Catholic is hugely perplexed no doubt.
Oh my. Do they ever understand the 'diff tween' real and pretend.
Not a question.
"Physical cash is THEIR #&(_+*%#!@"
It is "their" game.
Real money is not the script these agents play with.
Real money is what will still work after they are finished.
Kinda like rape.
But different?
That IS a question.
Let's play a new globalization game called, Rock, Scissors, Insolvency.... Weeeeeeeeeeee this is so fun!!
/sarc
Lets play / Ripleys," Believe it or Not!". This Shit is so " convoluted"! A bunch of "ass hounds", looking for a Milk Bone ®
Sorry, we're already at Capital Flight Crisis. What is step five?
Sweet , now I can add Slewie. A/j dipped and A/u is capped. Have a great w/e Slewie. I'm sure we will talk tomorrow..
All the crosses will be weighted now.
Tsipras is drawing a bigger crowd than the opposition in the streets...
look @ A/J h-4. Sweet h/s pattern, neckline @ 38% Fibi of the move from, 79.41-74.410. Uper Fibi 80.551.
I have friends in Greece (over 60 y.o.)...long ago I suggested they read ZH. They did.
They moved their tiny business across the border to Bulgaria and moved all their money out ...some to Bulgaria and some north (Switzerland I guess). Life has been tough readjusting he said. They said it is 100% miserable there back in greece especially in the larger cities.
On the bright side, they say the Bulgarians are a friendly bunch who seem to get along well with the mass migration.
As The World Turns, eh?
Genius. This article is pure genius.
Oh she went to a garden party and she was heard to say,
"Oh ve can't save everyone so we might as well save ourselves."
oldgas
ironically Ricky Nelson's best song came well after he was 'all washed up'.
The senario above is not much in my mind. TPTB are Corporate, military and secret. In the last depression the world delt with national socialism or fascism, in Germany they formed the Nazi Party and seized power by force and then fought with the rest of Europe and the world using sympatizers in every country to advantage.
This is the combination of State, Corporate anf Military power plus a strong police presence(Gestapo)
If Hitler hadn't been a racist they probably would have won militarily.
But they never lost, just regrouped and now we have a world Fascism, again Corporate cloaking itself in the flag and Capitalism.
The reason Germany more successful than other countries like the USA is that it has a mixed economic approach, strong socially, strong economically on a large and medium scale having kept industry within and flexible with economic theory. Nationally Germans support Germans.
To a lesser extent this is also true in France. These economies will stand.
The USA economy will not. Like the old USSR it will continue to bankrupt itself with military expenditures and will ultimately have to chose betweenwithdrawal of the forces and dismemberment of the military or disintigration of the Union. The USSR went th same way. It's economy was a fraud much like ours and based on military expenditure.
Our only hope is that the Euros help us by partnering with our currency through the world bank or some such. We should pray for parity, their money is worth more than ours for a reason.
Think outside the box ZHers, don't go blind on me.
Please read 1984 and a Tale of Two Cities and report back.
Unless you have been on the street with common Euro folk you don't understand what we are up against.
The kids can read books without pictures. They educate themselves and their children.
Now this country is way different.
bill
Bill, strictly speaking the Nazi party did not "seize power by force". In 1933 the Nazis were the democratically elected, largest party in the German Reichstag and Hitler was appointed Chancellor, which is a reasonable thing to occur when you have the largest party in a parliament. Certainly he used force to consolidate his power, but that is hardly uncommon.
Somehow you managed to avoid mentioning the world also struggling with communism during the depression era (and after), or indeed the extent to which communist agents penetrated the US government under FDR, including Harry Dexter White in the US Treasury, subsequently appointed first IMF head. Communist Russia under Stalin certainly turned out to rival Hitler for killing innocent people, as subsequently did Mao, Pol Pot, and sundry other communist leaders.
Obviously one of the consequences of Hitler's violence was to deprive Germany of Jews, while increasing their numbers in countries such as the US and UK. It is truly amazing that Germany has nonetheless prospered despite this lack, particularly in senior financial positions where the Jewish contribution is so profound (US, current and previous Fed chairmen), current and previous IMF heads as well as some of their predecessors, a goodly number on Wall Street. Maybe that is why Germany has been forced to stick to manufacturing instead of competing in the financial sector. Perhaps that explains the Chinese as well, since they also, for totally different reasons, are not blessed with many Jews.
Think outside the box, Bill, don't go blind on us.
I think many here are fighting the last war.
Why should the Euro holders panic and try to move Euros?
The ECB ain't the FED and so far the ECB has not over printed. What is to panic about? I can see that residents of several socialist countries that have way over promised might worry but compared to the dollar the Euro is fresh air.