Spain’s economic crisis has passed another scary milestone, as new central-bank data show that capital flight from the country now far exceeds levels reached in Asia during the worst of that region’s financial crisis in the 1990s.
Bank of Spain figures show that net capital outflows—including bank withdrawals and selloffs of Spanish stocks and bonds—equaled more than 50 percent of the country’s economic output over the year ended July 31. That compares with a 23 percent outflow from Indonesia, the country hardest hit by capital flight during the Asian crisis in 1997 and 1998, says Jens Nordvig, director of currency research at Nomura Securities International in New York. “I’ve never seen anything this big,” he says. “Spain is in a category by itself.”
Foreigners and Spaniards alike have contributed to the outflow. During the second quarter of this year, sales of Spanish securities by foreigners equaled 19.4 percent of the Spanish economy, while foreigners’ withdrawals from Spanish banks accounted for another 15.3 percent. Money deposited by Spanish residents into non-Spanish banks totaled an additional 16.7 percent.
Even more worrisome, capital flight seems to be accelerating. Spanish bank deposits by companies and households shrank €74.2 billion ($93.4 billion) during July, according to the European Central Bank. “Only in Greece have deposits contracted at a faster pace—increasing the pressure on banks to deleverage even further,” says Tobias Blattner of Daiwa Capital Markets in London.
As a member of the euro common currency, Spain has been cushioned by the ECB’s so-called Target 2 system, which provides automatic funding to member countries experiencing capital outflows. Still, says Nordvig, Spain’s banking system “is running out of liquidity and running out of collateral,” since collateral has to be pledged to the ECB when it provides funds. That means Spanish banks are lending less, a drag on economic growth. Daiwa’s Blattner says Spanish bank loans to the private sector have declined 4.8 percent over the past year.
At the same time, bad loans as a proportion of total lending in Spain hit 9.42 percent in June, the highest on record. Spain this summer sought a 100 billion euro bailout for its banks and is urging unlimited bond buying by the ECB to lower borrowing costs. “Restructuring of the banking system is urgent,” Nordvig says.
Apart from Greece, capital flight from other troubled European economies has been relatively modest during the region’s debt crisis. Italy’s capital outflows over the past 3 months have totaled about 15 percent of economic output, compared with more than 50 percent in Spain.