Econintersect: It is like a World War II headline: German Troops Pull Back from the Mediterranean. Only this time it’s a banking maneuver, no soldiers or armaments involved. An article by Brooke Masters in the Financial Times suggests that the reduction of lending by German banks to the weaker countries of the Eurozone, which has been underway for more than two years, is now accelerating. Since the beginning of 2012 such lending is down by nearly 20%. The FT gives as an example that lending by German banks to Italy is down 25% for the first five months of the year.
Why should German banks be lending? Because that’s where the money is. (Apologies to Willie Sutton.) As deposits flee the banks in the other countries of the Eurozone, the deposits in German banks keep swelling. Deposits are also increased because of Germany’s current account surplus, which is achieved in part because of the deficits in many of the other Eurozone countries. It is an embarrassment of riches because the neighbors are going under financially.
Demand remains high for loans in Germany, even home mortgages while elsewhere demand has fallen. Even in some countries that have not suffered from the current crisis, for example the Netherlands, loan demand is down. The following graphic accompanies an article by Floyd Norris in The New York Times:
Click on graphic for larger image.
From the Norris article:
The second-quarter survey was conducted from June 21 to July 5, a period that Julian Callow, an analyst for Barclays Capital, noted “excludes the latest episode of acute financial distress in Southern European bond markets.” He speculated that the figures would have been even more negative had the survey been conducted more recently.
Because of fleeing deposits, many periphery countries have been forced to borrow from the ECB (European Central Bank). Some examples given by Norris include Italy, borrowing nearly €275 billion and Spain more than €400 billion. Where does the money come from? A lot has come from Germany which now has outstanding loans to the ECB totaling almost €730 billion, according to Norris.
The largest bank runs have occurred in Greece where deposits are down by 30% in less than three years. In Greece ordinary citizens have been withdrawing their accounts but so far elsewhere the biggest capital flights are the result of foreign deposits leaving. From an article by Jack Duffy at mni Financial News:
But the capital flight is not just in government bonds. Matt King, global head of credit products strategy at Citigroup, says that from their peak bank deposits by foreigners have fallen by 64% in Greece, 55% in Ireland, 37% in Portugal, 13% in Spain and 34% in Italy.
In a research note, King noted that Italy lost E160 billion in foreign private capital in 2011, while Spain lost about E100 billion. If capital outflow reaches the same average level that has occurred in Greece, Portugal and Ireland, Rome and Madrid could each lose another E200 billion, he said.
"Capital flight will stop only once there is decisive policy intervention," King says. "The longer investors have to wait for this, the more decisive it will need to be."
The fact is that investors no longer believe that a Greek euro, or a Spanish euro, or an Irish euro is the same as a German, Finnish or Austrian euro. As a consequence, private foreign capital is draining away from the periphery and being replaced with official capital, mostly provided by the European Central Bank.
But not all the money fleeing the rest of the Eurozone is going to Germany. Some is going to dollars and ending up in the U.S., fueling the recent rally in Treasuries. A minor amount not going to Germany is staying in euros and ending up in French banks and periphery banks are also increasing the share of their dwindling deposits in accounts with the ECB. The overall process has been described by Gordon T. Long at the Socio-Economics History Blog. In net, Germany is the biggest beneficiary of the capital flight from the rest of Europe.
Yes, Willie, that’s where the money is – that which hasn’t escaped to the U.S.
- German banks cut back periphery lending (Brooke Masters, Financial Times, 29 July 2012)
- Loan Survey Illustrates a Banking Divide in Europe (Floyd Norris, The New York Times, 27 July 2012)
- Greek, Spanish savings flee eurozone crisis/ (Associated Press, Fox News, 16 June 2012)
- EuroView: Capital Fleeing the Entire Periphery, Not Just Greece (Jack Duffy, mni Financial News, 25 May 2012)
- SS €uro is Taking On Serious Water! (Gordon T. Long, Socio-Economics History Blog, 08 June 2012)