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Thursday, May 31, 2012 10:52 AM

Capital Flight Intensifies to Record Levels in Spain; Outflows Make Spanish Banks Increasingly Reliant on ELA Funding

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Here is a note regarding capital flight in Spain and Greece that I received via email.

Capital flight has intensified to record levels in Spain but interestingly leveled off in Greece. Capital flight from Greece is expected to resume when next reported given statements by the Greek president.

The original source of this information appears to be Credit Suisse AG.

Spanish private Sector Deposit numbers dropping at a faster rate

The Spanish bond markets continue to be viewed with both suspicion and concern by would be investors, with the shocking size of the Bankia bailout send clear warning signs of what else might yet emerge from the Spanish banking sector. Investors were also unimpressed by what appears to have been a very poorly thought out strategy for recapitalising Bankia, with the ECB indicating that they were not consulted by the Spaniard’s before the bonds-for-repo strategy was announced. The Spanish government has lost further credibility because of its handling of this issue, and has since announced that it will indeed have to raise cash from the markets and use the proceeds to recapitalise Bankia.

The ECB published the latest aggregated balance sheet of the euro area MFI’s on Wednesday, which contained the usual array of interesting and relevant data. The Spanish numbers were obviously in focus given the markets current attention to the Iberian peninsula. The data showed that the run up in bank buying of Spanish Government bonds came to an end in April, with a net reduction of €3.3bn in holdings being recorded at month end.

The private sector deposit numbers were also closely looked at, with April seeing a huge €31.5bn reduction in deposits being placed by households and non-financial corporates. This was close to the all time record outflow posted back in January 2010, though that number was driven by year end reporting factors. The April 2012 number appears to be much more significant, and is likely to be repeated in May. Over the last 7 months the net reduction in Spanish Private Sector Deposits has now totalled €92.2bn. These outflows make the Spanish banks increasingly reliant on ELA funding via the Bank of Spain.

Interestingly the ECB data showed that the recent deposit flight reported in Greece appears to have levelled off, with the amount of private sector deposits actually increasing by €400mn in April. This was the second consecutive monthly increase, after two large outflows were reported in January and February. Given the commentary from the Greek President earlier this month we would expect to see a sharp increase in outflows when the May numbers are reported at the end of next month.

At an aggregate level it remains quite clear that most of the deposit outflows from the peripheral nations are being recycled to other parts of the euro-zone. Germany and Holland in particular have seen large inflows of deposits in the months where the peripheral nations have seen outflows. These balances are effectively getting recycled back to the home country each day, via the ECB’s TARGET 2 cash management system. As the inflows get larger so too does the TARGET 2 imbalance, causing even greater cross border systemic risk. The Bundesbank in particular has been awake to this issue for some time, noting that the risk of losses is high if a debtor nation does decide to suddenly leave the euro-zone.
Mike "Mish" Shedlock
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