Deposit Flight from euro zone periphery to Germany

In August, Claus wrote a piece questioning the concept of a capital flight out of the euro zone and into US dollar assets due to the sovereign debt crisis. He quoted from a piece by Simon Ward that stated:

Scott Grannis, for example, argues that US money demand has been boosted by massive capital flight from the Eurozone as investors anticipate a break-up of the single currency. The US money supply gain, however, has not, to date, been fully offset by Eurozone weakness – G7 monetary growth, therefore, has risen. Eurozone figures for July, released next week, could conceivably change the story but would need to show a large decline to offset US strength.

The Grannis theory of a huge capital inflow to the US from Europe, in any case, is inconsistent with the stability of the euro / dollar exchange rate in recent weeks.

Rob Parenteau commented to me the next month that:

I am willing to wait for September results, but I think the answer is clear in the August money stock results. International macro 101 says the foreign exchange rate, not money supply, reflects changes in capital flows from shifts in portfolio preferences. Some investors do not remember this and end up concocting all kinds of stories about "liquidity" sloshing around, but this does not stand up to analysis.

Nevertheless, we still should get euro zone bank loan growth contracting as Q4 rolls on though, but not for ‘deposit flight out of euro zone’ reasons (at least until Greece officially defaults on interest payments).

The data have since shown that this deposit flight out of the euro zone into the US just isn’t happening.

But what about intra-euro zone deposit flight? Here’s a chart from the Council on Foreign relations that suggests this could be a story supported by the data.

The CFR commentary to the graph is:

The eurozone leadership is finally coming around to accepting that a major continent-wide bank recapitalization program is necessary. Germany wants each country to take care of its own banks. This approach could buy time, but it won’t work for long. National bank backstops are untenable in a common currency area, as each sovereign has its own credit risk profile. Depositors will simply flee toward the better backstops. This can already be seen in the correlation between bank deposits in Germany and the PIGS (Portugal, Ireland, Greece, and Spain). Before the financial crisis, those deposits were tightly correlated, as shown in the graphic above, but over the past two years the correlation has flipped – deposits are fleeing the PIGS and flying into Germany. A stable eurozone banking system will require a unified regulatory, resolution, and rescue regime.

Source: Eurozone Bank Deposits Are Fleeing for Germany


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.