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Eurozone Crisis Spain's Capital Flight Is Now Bigger Than Asian Financial Crisis

Interest-Rates / Eurozone Debt Crisis Sep 05, 2012 - 12:41 PM GMT

By: DK_Matai

Interest-Rates

Best Financial Markets Analysis ArticleSpain is emerging as the centre of the battlefield for the survival of the Eurozone as the probability for further fragmentation and exits increases dramatically. The flight of capital from Spain is now bigger than what Indonesia, one of the hardest hit countries during the Asian financial crisis experienced in the late 1990s. On an annualised basis, portfolio and investment outflows from Spain now total more than USD 750 billion, ie, more than 50 percent of the country’s Gross Domestic Product (GDP) as measured by the World Bank.


That's more than double the outflows from Indonesia, which reached 23 percent of its GDP at the time of the Asian crisis. Nomura’s Jens Nordvig says Spain’s crisis has entered a “more dangerous phase”, resembling the sort of currency dramas once confined to emerging markets. Net claims on Spain through the European Central Bank (ECB) Target 2 payments system have now reached 39 percent of its GDP. “The build-up in central bank liabilities is explosive,” says Mr Nordvig, Head of Fixed Income Research, Americas, and Global Head of G10 FX Strategy at Nomura Securities.

How sustainable is this? Target 2 balances of Spain & Italy versus Germany

Markets Price Break-up of Eurozone

Jorg Asmussen, Germany’s ECB board member has said that sovereign bond purchases are necessary to save the euro and, therefore, within the bank’s mandate. “The risk premia of sovereign bonds now reflect not just the insolvency risk of some countries but an exchange rate risk, which should not theoretically exist in a currency union. The markets are pricing in a break-up of the eurozone. Such systemic doubts are not acceptable,” he said.

Who Is Pulling Capital Out of Spain?

Spaniards and foreign investors have been pulling money out of Spanish banks faster than ever before as the domestic economy has worsened in recent months. Without the single currency and the flows from the ECB, Spain would already be going through a major currency crisis at this stage. There are plenty of reasons for this flight of capital, including the fact that the Spanish economy is more leveraged than Indonesia’s and Spain's currency union with Europe allows very large capital movements to take place.

Challenge to Banking Sector Stability

The broad-based nature of the capital flight from Spain involves:

1. Banking claims and securities; and

2. Outflows from both residents and non-residents.

This makes for a rather extreme overall outflow, and one that raises serious concerns about the implications for the Spanish banking sector's ongoing stability and economic growth. Foreigners sold Spanish securities worth 19 percent of GDP over the past quarter alone. Spanish residents caused funds outflow worth 16.7 percent of GDP into foreign bank accounts in the last quarter alone. This situation is clearly unsustainable.

Spanish Government Bailout

The Spanish government has so far resisted asking for a bailout from the European Union and other international creditors such as the IMF, except for the aid already agreed to for its banking sector. France and Germany now want Prime Minister Rajoy to request a full international bailout to prop up Spanish finances and to stop the debt crisis deepening.

Conclusion

Do these escalating flights of capital portend the inevitable break-up of the Eurozone? Is the scale of the gap created by the massive flight of capital now so large that anything the ECB might do to put a cap on sovereign bond yields may now prove to be insufficient to bridge the chasm? The cost of the break-up of the Eurozone would be absolutely enormous for the richer north European countries. Why? Large positive Target 2 balances have now arisen with the national central banks in the four northern Eurozone rich countries – Germany, the Netherlands, Luxembourg, and Finland – and corresponding big negative balances have now arisen with eight countries – Italy, Spain, Ireland, Greece, France, Portugal, Belgium and Austria. In the event of departure, the rich countries will experience massive black holes or defaults on their central bank balance sheets.

What are your thoughts, observations and views? We are hosting an Expert roundtable on this issue at ATCA 24/7 on Yammer.

By DK Matai

www.mi2g.net

Asymmetric Threats Contingency Alliance (ATCA) & The Philanthropia

We welcome your participation in this Socratic dialogue. Please access by clicking here.

ATCA: The Asymmetric Threats Contingency Alliance is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy. Adhering to the doctrine of non-violence, ATCA addresses asymmetric threats and social opportunities arising from climate chaos and the environment; radical poverty and microfinance; geo-politics and energy; organised crime & extremism; advanced technologies -- bio, info, nano, robo & AI; demographic skews and resource shortages; pandemics; financial systems and systemic risk; as well as transhumanism and ethics. Present membership of ATCA is by invitation only and has over 5,000 distinguished members from over 120 countries: including 1,000 Parliamentarians; 1,500 Chairmen and CEOs of corporations; 1,000 Heads of NGOs; 750 Directors at Academic Centres of Excellence; 500 Inventors and Original thinkers; as well as 250 Editors-in-Chief of major media.

The Philanthropia, founded in 2005, brings together over 1,000 leading individual and private philanthropists, family offices, foundations, private banks, non-governmental organisations and specialist advisors to address complex global challenges such as countering climate chaos, reducing radical poverty and developing global leadership for the younger generation through the appliance of science and technology, leveraging acumen and finance, as well as encouraging collaboration with a strong commitment to ethics. Philanthropia emphasises multi-faith spiritual values: introspection, healthy living and ecology. Philanthropia Targets: Countering climate chaos and carbon neutrality; Eliminating radical poverty -- through micro-credit schemes, empowerment of women and more responsible capitalism; Leadership for the Younger Generation; and Corporate and social responsibility.

© 2012 Copyright DK Matai - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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