Blog Post

(Slowly) back to normal in the Eurozone?

Private capital is returning to the distressed Eurozone countries and sovereign bonds. 2012 might be remembered as the year in which two “ends of the world” were luckily averted: one, thanks to the wrong intuition of a Mayan forecaster; the other one, thanks to the right intuition of a European central banker.

By: Date: January 31, 2013 Topic: Macroeconomic policy

Private capital is returning to the distressed Eurozone countries and sovereign bonds.

2012 might be remembered as the year in which two “ends of the world” were luckily averted: one, thanks to the wrong intuition of a Mayan forecaster; the other one, thanks to the right intuition of a European central banker.

Back in 2012, the capital flight from the weaker Eurozone countries reached maximum intensity. In terms of magnitude, the capital outflows were massive, as the capital inflows that preceded the crisis had been. Between the April 2010 and August 2012, net private capital outflows totalled 167bn in Greece, 118bn in Ireland and 99bn in Portugal.  In terms of pre-crisis GDP, these figures amount to about 75%, 62% and 59% respectively. Starting in summer 2011, private investors started to leave also Italy and Spain, which between May 2011 and August 2012 recorded outflows of 303bn (19% of pre-crisis GDP) and 364bn (35% of pre-crisis GDP). The gap was filled by the liquidity provided through the Eurosystem, which banks made extensive use of and which sheltered countries from the consequences of a full-fledged sudden stop in external financing.

Things started to change after the ECB unveiled the OMT programme and plans for the creation of a banking union were announced. Both Spain and Portugal posted in September the first net private capital inflow since one year. After that, private capital has continued flowing back into the Southern countries. Financial account data and the evolution of the TARGET2 balances suggest that between September 2012 and the end of the year, net private inflows amounted to about 100bn, which is in the order of 10% of the total outflows mentioned earlier. The effect of private capital inflows is visible in the evolution of TARGET2 balances, whose divergence has also stopped and started to reverse.

 

 

NOTE: data up to November 2012 for Greece and Portugal, October 2012 for Italy and Spain.

Importantly, foreign investors are returning also to the particularly distressed sovereign bond markets where the outflows had been sizable.  Mario Draghi’s pledge to do ‘whatever it takes’ to preserve the monetary union coincided with the start of a decline in yields of troubled Eurozone sovereigns. Before the announcement a larger and larger share of Greek, Irish, Italian and Spanish bonds had been off-loaded by foreign investors and acquired by domestic banks, which reinforced the sovereign-bank loop that was partly responsible for the elevated yields originally. Therefore, a crucial test of the credibility of Draghi’s pledge was whether foreigners would regain faith in distressed bonds. According to the newest update of Bruegel dataset on sovereign bond holdings[2] there are tentative signs that this is happening.

Share of bonds held by resident banks and non-residents up to Q3/2012.

In Spain the share of bonds held by non-residents increased from 29.6 % in Q2/2012 to 30.8 % in Q3/2012. In Italy and Ireland the non-resident share seemed to stabilize after having dropped by 10 and 9.3 %-points respectively during the preceding year (Q2/2011-Q2/2012). Symmetrically, the share of resident banks declined by 1.7 %-points from Q2/2012 in Spain and stabilized in Italy and Ireland. Nevertheless, banks in these countries are still much more exposed to their sovereigns than before the crisis as the examples of Italy and Spain show.

Holdings of sovereign bonds by domestic banks (euro bn).

The recent healthy developments can be considered a further indication of the enhanced faith in the resilience of the euro by international investors. However, only a few data points should not be overinterpreted. As the data only extends until Q3/2012, it will be informative to see if the increased optimism during the last quarter of 2012 was reflected in further normalization of bond holding shares.[3]  

Risk-aversion is more difficult to reverse than risk-enthusiasm, but the data presented in this post point to the right direction and suggest that the situation is (slowly) improving in the Eurozone financial markets. Maintaining and reinforcing this positive momentum over the coming months will be essential.


[1] Many thanks are due to Silvia Merler for excellent collaboration on this post.

[2] (Merler, S. and Jean Pisani-Ferry (2012), “Who’s afraid of sovereign bonds?”, Bruegel policy contribution 2012|2, February),

[3] We do not cover Greece here because its central bank changed their accounting method for bond holdings in 2012, which renders analysis unreliable. Portugal only publishes yearly data on bond holdings by sector and has not yet released it for 2012.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Blog Post

European governance

Opaque and ill-defined: the problems with Europe’s IPCEI subsidy framework

Lack of strict governance and transparency creates serious risk that fair competition within the single market will be undermined. Fundamental overhaul of the framework is needed.

By: Niclas Poitiers and Pauline Weil Topic: European governance, Macroeconomic policy Date: January 26, 2022
Read article More by this author
 

Podcast

Podcast

Turkey’s economic struggles

Will inflation continue to surge?

By: The Sound of Economics Topic: Global economy and trade, Macroeconomic policy Date: January 26, 2022
Read article More by this author
 

Opinion

European governance

The euro comes of age

A well-functioning euro reflects a degree of unity that allows the EU to credibly claim a position at the global table and therefore help shape the policies that will deal with global problems. That is a decisive success.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: January 13, 2022
Read article More on this topic More by this author
 

Opinion

A role for the Recovery and Resilience Facility in a new fiscal framework

Discussions on reforming European Union fiscal rules must consider a more permanent but targeted role for the Recovery and Resilience fund to meet climate ambitions.

By: Maria Demertzis Topic: Macroeconomic policy Date: January 10, 2022
Read article More by this author
 

Podcast

Podcast

The European economy in 2022

What are the economic priorities for the new year?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: January 5, 2022
Read article More by this author
 

Opinion

European governance

The Euro at 20

The euro’s advocates hoped that the single currency would deliver economic and financial integration, policy convergence, political amalgamation, and global influence. While these predictions were often wide of the mark, the euro has arguably proven to be a wise investment.

By: Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: January 3, 2022
Read article
 

Blog Post

European governanceInclusive growth

12 Charts for 21

A selection of charts from Bruegel’s weekly newsletter, analysis of the year and what it meant for the economy in Europe and the world.

By: Hèctor Badenes, Henry Naylor, Giuseppe Porcaro and Yuyun Zhan Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: December 21, 2021
Read article
 

Blog Post

European governance

Policy coordination failures in the euro area: not just an outcome, but by design

Discussions on the fiscal framework should aim to correct its procyclical nature with a view to promoting more cooperative outcomes.

By: Maria Demertzis and Nicola Viegi Topic: European governance, Macroeconomic policy Date: December 20, 2021
Read article
 

External Publication

European governance

EU borrowing—time to think of the generation after next

Financing post-pandemic recovery via EU borrowing has proved remarkably straightforward. So why keep it temporary?

By: Grégory Claeys, Rebecca Christie and Pauline Weil Topic: European governance, Macroeconomic policy Date: December 9, 2021
Read article More on this topic More by this author
 

Opinion

Inflation ideology: camp permanent or camp temporary?

Policy focus should be on tackling uncertainties by being able to tackle as many scenarios as possible.

By: Maria Demertzis Topic: Macroeconomic policy Date: December 9, 2021
Read about event More on this topic
 

Past Event

Past Event

Fiscal policy and rules after the pandemic

What are the possibilities for shaping the new fiscal policy?

Speakers: Zsolt Darvas, Maria Demertzis, Michel Heijdra and Katja Lautar Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 24, 2021
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Load more posts