ANNUAL REPORT 2008 - Polymer Bank Notes of the World

quarter of 2008 and -0.1% in December, havingstood at 8.5% at the end of 2007. Developmentsare especially relevant in the case of twosub-components, namely longer-term depositsand MFI debt securities. The reduction observedin the growth rate of holdings of longer-termdeposits may reflect a shift towards shortermaturities given the shape of the yield curve andthe intensification of financial tensions, whiledevelopments in long-term debt securities issuedby MFIs point to the difficulty of obtainingfunding through this source.The net external asset position of the MFI sectordisplayed two different trends in the course of2008. Sizeable capital outflows were observedin the first half of the year, averaging more than€30 billion per month, followed by smallerinflows in the second half. Those outflowswere probably driven to a large extent bynon-euro area residents selling euro area assets(i.e. shifts out of euro area assets), while theinflows reflect the fact that external liabilitiesdeclined more strongly than external assets.As a result, the annual inflows observed inMFIs’ net external asset position in the courseof 2007 became annual outflows at the start of2008. Those annual outflows peaked at almost€300 billion in July, before decreasing thereafter.These continued outflows probably reflect theongoing rebalancing of international portfolios,particularly in relation to the deterioration ofeconomic prospects in the euro area and the needto obtain liquidity. The monetary presentation ofthe balance of payments reveals that the annualoutflows observed in MFIs’ net external assetposition mainly reflect a decline in net portfolioinvestment in equity.MONEY MARKET TENSIONS INTENSIFIED IN THECONTEXT OF THE FINANCIAL MARKET TURMOILEuro money markets continued to exhibitsevere tensions throughout 2008, following theonset of the global financial turmoil in August2007. Interbank trading volumes remained verymodest, particularly at longer maturities, andthe spreads between secured and unsecuredmoney market rates remained very elevated byhistorical standards.Unsecured money market interest rates roseacross the entire maturity spectrum betweenJanuary and the beginning of October, beforedeclining substantially thereafter. Having stoodclose to 4% in January 2008, the three-monthEUREPO rate rose to a peak of around 4.35%at the end of July and the beginning of August.It then stayed around that level until mid-September, before declining to stand at around0.94% at the end of February 2009. This mainlyreflected developments in key ECB interest ratesand market expectations regarding those rates(see Section 1 of this chapter).In addition to developments in policy rates,variations in both the intensity of the ongoingfinancial market tensions and the impact thatthose tensions had on credit and liquidity premiaalso played an important role in determiningunsecured money market interest rates(see Box 2). More specifically, the three-monthEURIBOR increased from a low of 4.29% on29 January to peak at 5.39% on 9 October. Theincrease was particularly steep in the aftermathof Lehman Brothers’ default in mid-September(see Chart 9). The three-month EURIBOR thenfell to stand at 2.89% at the end of 2008 – aresult not only of expectations of policy ratecuts, but also of Member States’ announcementof government packages to support financialinstitutions. At the end of February 2009 thethree-month EURIBOR stood at 1.83%.The slope of the money market yield curve –as measured by the spread between thetwelve-month and one-month EURIBOR rates –showed some volatility in the course of 2008,with that spread rising from a low of 12 basispoints at the end of January 2008 to peak at97 basis points in June, before declining andstabilising at around 50 basis points at the endof February 2009.The spread between secured and unsecuredmoney market rates was also very volatile in2008, remaining elevated by historical standardsand exceeding the levels observed in the secondhalf of 2007 in the initial phases of the financialturmoil. The spread between the three-monthECBAnnual Report200839