– Bank of France debts jump tenfold on capital flight (Telegraph, Dec. 6, 2011):
French lenders lost €100bn (£86bn) in short-term deposits in September alone, mostly due to precautionary moves by US money market funds and Asian investors afraid of France’s exposure to Italy. “There were huge net capital outflows,” said Eric Dor from the IESEG School of Management in Lille.
The effects of this capital flight are surfacing on the Bank of France’s books under the European Central Bank’s so-called “Target2” scheme, an ECB payment network that lets funds move automatically where needed.
Liabilities jumped suddenly in late July, rising from €10bn to €98bn by September. Ireland’s central bank owes €118bn, Spain’s €108bn and Italy’s €89bn.
The triple-trigger appears to have been a sudden drop in Club Med manufacturing orders, an ECB rate rise, and the EU’s July summit – which led to haircuts on Greek bondholders and battered faith in EMU sovereign debt.
Mr Dor said there had been an exodus from distressed states into German, Dutch and Luxembourg banks. This shows up in the Target2 data.
While the liabilities can in theory keep rising for ever within EMU, they signal grave imbalances, such as the North-South trade gap so long ignored until it proved fatal. They ultimately leave debtor central banks deep under water if the eurozone breaks up. “We are in unknown territory in terms of monetary theory,” said Mr Dor.
On the creditor side, the Bundesbank is left holding €465bn in IOUs, and the Dutch central bank €89bn, stoking fears that these countries could suffer a big loss if EU leaders fail to contain the crisis. The national central banks are also on the hook for the ECB’s other operations.
Simon Ward from Henderson Global Investors said ECB support has jumped by €465bn since April, with a sharp rise of €102bn over the last four weeks. The total exceeds €1.3 trillion, or 4.5pc of eurozone GDP.
It includes “repo” loans to eurozone banks, as well as emergency liquidity assistance (ELA) to Greece and Ireland, and bond purchases. The nexus of liabilities would be a nightmare to unscramble.