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January 28, 2013 7:01 pm
Almost €100bn of private funds flowed back into the eurozone’s periphery late last year after action by the European Central Bank encouraged reinvestment in the crisis-hit countries.
The scale of the net inflows, equivalent to about 9 per cent of the economic output of Spain, Italy, Portugal, Ireland and Greece according to calculations by ING, the Dutch bank, highlight the revival in investor confidence in Europe’s monetary union after Mario Draghi, ECB president, pledged to preserve its integrity.
The return of capital has encouraged policy makers to believe the eurozone crisis is over, with Mr Draghi this month pointing to “positive contagion” in the region. The euro has also moved sharply higher.
Adding to evidence of a turn in sentiment, figures from the US Commodity Futures Trading Commission showed traders were last week more bullish on the euro than they have been in 18 months. Net long positions on the euro reached their strongest level since the summer of 2011.
However, the private inflows into the bloc’s periphery remain modest compared with far larger outflows earlier in 2012, when many financial markets feared a eurozone break-up.
Total net private inflows into the periphery countries totalled €93bn in the last four months of 2012, according to ING. In contrast, the first eight months had seen €406bn flow out of the five countries, equivalent to almost 20 per cent of gross domestic product in the periphery economies. In 2011, outflows from the periphery totalled €300bn.
“There is still a way to go, but there has been a significant reversal of the capital flight,” said Martin van Vliet, ING economist. “If you look at the outflow in the first eight months of last year, it was scary. Trust is hard to gain and easy to lose.”
With investor demand for eurozone assets rising, the Spanish and Italian governments have seen their borrowing costs fall sharply. Eurozone corporate and bank bond issuance has also strengthened this year, with traders reporting a different mood from early 2012, when issuance also surged after the ECB flooded banks with more than €1tn in cheap three-year loans.
“This rally isn’t being driven by free money to domestic banks, but rising confidence in the eurozone as a project, and buying by significant non-European investors,” said Carl Norrey, head of European rates trading at JPMorgan. “Deals we couldn’t have imagined just two months ago are now getting done, and with massive order books.”
The euro on Monday reached its highest level since December 2011 on a trade-weighted basis. “The last euro bear seems to have died on Friday,” wrote Jens Nordvig, global head of currency strategy at Nomura, in a note.
But some of the inflows into eurozone assets may have resulted from investors being forced to follow the herd – rather than a conviction that the eurozone is on the mend, analysts said.
“Investors are being squeezed into the periphery,” said Nigel Sillis, strategist at Barings, the asset manager. “If your performance is bad and you’re underweight the periphery, you may decide to go into it against your better judgment.”
Mr Draghi in September unveiled his “outright monetary transactions” scheme, by which the ECB could buy the bonds of eurozone governments that signed up to externally approved reform programmes.
His announcement was a turning point, especially for US investors. “Europe became investable again,” says Alasdair Warren, European head of equity capital markets at Goldman Sachs. “For European deals, US demand has rarely been as strong or pronounced as it is now.”
ING’s figures used national economic data and deducted official capital flows.
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