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Eurozone: BoP Leaves Euro Vulnerable
• Despite the worsening of the eurozone debt
crisis last November, foreign investors turned
net buyers of bonds and notes in that month.
• The fact that non-eurozone capital flows
were not the cause of the bond crisis is not
reassuring for the euro.
Chart 1: EMU Current Account (EUR bn/m, s.a.)
10
Goods
Services
5
0
-5
-10
Current account deficit is widening
The eurozone’s current account deficit widened
sharply in November, from EUR 2.1bn in October to
EUR 6.0bn (unadjusted). While in unadjusted terms
the eurozone posted its largest deficit for the year
back in September (EUR 6.5bn), in seasonally
adjusted terms the deficit rose from EUR 9.6bn in
September to EUR 11.2bn in November – the largest
monthly deficit since late 2008.
The situation has been deteriorating rapidly
(Chart 1). The main reason for the widening of the
current account deficit is the widening of the
merchandise trade deficit, where nominal export
gains (22.9% y/y in November) have been outpaced
by the increase in imports (28.2%) boosted by
stronger inflation on imported goods. (For example,
in Germany, import prices rose 10.0% y/y compared
to a 4.5% increase in export prices.) The surplus on
services, not subject to such price developments,
remained strong in November, supported by rising
exports (13.2% y/y).
The deficit on income is also widening. Inflows,
mostly interest payments, are declining, while
outflows are rising and are likely to continue to do so
given the impact of the financial crisis on payments.
Capital flows show a surprising pattern
On the capital account, foreign direct investment
printed a monthly surplus in November, for the first
time this year. The surplus reflected significant loans
to eurozone subsidiaries by foreign entities and is
likely to have disappeared in December. Net outflows
in equities were modest in November and corrected
part of the previous month’s inflow.
The main surprise on the capital account in
November came from bonds and notes (Chart 2).
While the eurozone sovereign bond market was in
disarray, foreign investors bought a net amount of
EUR 10.8bn of eurozone bonds in November. This,
combined with net sales of foreign bonds from
eurozone investors, raised net inflows on bonds and
notes to EUR 19.8bn. Thus foreign investors, rather
than fleeing the Eurobond market, actually increased
-15
-20
-25
05 06 07 08 09 10
Source: ECB, Reuters EcoWin Pro
Total
Chart 2: EMU BoP, Flows on Bonds and Notes
(EUR bn/m, n.s.a.)
75
50
25
0
-25
-50
-75
Inflow
Outflow
2008 2009 2010
Source: ECB, Reuters EcoWin Pro
Balance
their purchases during the crisis. Note the same
occurred in April-May 2010, when Greece was
subject to the market's scrutiny. They are also keen
to exit the market when it is quieter, either to take
short-term profit or, for real money investors,
because such instruments are a more limited share
of their total portfolio than for most eurozone
domestic investors. Despite November’s surge,
foreign appetite for eurozone bonds shows a trend
decline.
The bottom line is that, despite a large current
account deficit, the eurozone’s basic balance (the
current deficit and flows of long-term capital)
registered a surplus in November of EUR 31.7bn, the
largest for any month in 2010. With the basic balance
in solid surplus, the euro’s decline in November
reflected the impact on other flows of concerns over
the debt crisis and uncertainties over the longer-term
outlook of the eurozone. Such concerns are likely to
persist longer than November’s capital inflow.
Dominique Barbet 20 January 2011
Market Mover
24
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