ANNUAL REPORT 2008 - Polymer Bank Notes of the World

segments and, in turn, affected euro area crossborderportfolio investment flows. Specifically,the equity market witnessed unusually high netsales of both euro area financial instrumentsby global investors and foreign equities byeuro area investors. Global investors seemedto reduce their foreign investments, possiblyreflecting more cautious investment strategiesand the global fall in equity prices.Also in the wake of the financial turmoil, bothforeign direct investment flows into the euroarea and euro area investment flows abroad fellsubstantially in 2008, indicating a preference forhome markets. Disinvestments by non-residentsin the euro area were larger than euro areadisinvestments abroad, leading to overall highernet outflows of direct investment for the euro area.Finally, higher net inflows of debt securities,amounting to €345.6 billion, compared with€122.8 billion in 2007, contributed to theincrease in net inflows in the financial account.Increased risk aversion, heightened liquidityneeds and short-term interest rate differentialsmight have contributed to this development. Inparticular, money market instruments recordedstrong net inflows, reaching in September andOctober 2008 their highest levels since 1999.These developments possibly reflect attemptsto boost liquidity amid the intensification of thefinancial turmoil.INTERNATIONAL INVESTMENT POSITION IN 2008Data on the international investment position(i.i.p.) of the euro area vis-à-vis the rest of theworld, available up to the third quarter of 2008,indicate that the euro area recorded net liabilitiesof €1,158 billion vis-à-vis the rest of the world(representing 12.5% of euro area GDP), comparedwith net liabilities of €1,131 billion (also equalto 12.5% of GDP) at the end of 2007 (seeChart 37). This marginal increase in net liabilitiesin 2008 resulted largely from an increase inthe net liability position in other investment(by €191 billion) and in portfolio investment (by€76 billion), which were almost entirely offsetby an increase in the net asset positions in euroarea direct investment abroad (by €182 billion)and in financial derivatives (by €35 billion).Reserve assets also increased only marginally,with valuation effects resulting from asset pricechanges and movements in the exchange ratecontributing to these developments.Chart 36 Euro area direct and portfolioinvestment(annual data; EUR billions)375300225150750-75-150-225-300-3751234200520062007200812 3 4375300225150750-75-150-225-300-375Net direct investmentNet portfolio investment in equitiesNet portfolio investment in debt instrumentsCombined net direct investment and portfolio investmentSource: ECB.Note: Data for 2008 refer to the year to October 2008.Chart 37 Net international investmentposition(as a percentage of GDP)0-2-4-6-8-10-12-142005 2006 2007 2008Source: ECB.Note: Data refer to the year-end except for 2008 (third quarter).0-2-4-6-8-10-12-14ECBAnnual Report200885