Photo: @patrihorrillo on yfrog
One of the major worries for the European Union is accelerating capital flight from troubled periphery countries spreading to Italy and Spain.Once it starts to cause bond yields to rise, it could be extremely difficult to stop, writes Citi’s Matt King. According to a recent note to clients, capital flight has begun and there’s likely to be more to come.
A look at imbalances in TARGET2, Europe’s interbank payment system, shows that private capital was fleeing the periphery even before Greece’s elections renewed worries of an exit.
A combined €260 billion left Italy and Spain last year, and Citi thinks it’s quite likely that another €200 billion could depart each without policy action. A Greek exit, weak economic numbers, or credit downgrades could dramatically increase these outflows and shorten the time frame
From this morning’s note:
In Greece, Ireland and Portugal, once begun, capital flight has continued almost monotonically, showing no sign of reversal even when markets have been rallying. We think this is because of the asymmetric nature of risk for bond- and deposit-holders, and see little reason why Spain and Italy should be any different.
Europe faces many long-term structural issues. But the immediate problems are starting to pile up.