In the last ECB weekly statement overview i touched (yet again) the issue of ever increasing euro outflows from the Eurozone (probably to Switzerland). These are reflected in ‘liabilities to non euro area residents’ in the ECB weekly statement. In this note i would like to point out that these liabilities only reflect bank reserve account holdings.

Normally, a central bank accumulating foreign exchange reserves (for instance the PBoC or BoJ for dollars) will quickly invest them in ‘risk-free assets’, mainly Treasury notes in order to earn an interest (although central banks do carry out reverse repos in order to also provide counterparties with interest income on their reserve accounts), holding only a small part of their assets in reserve accounts. That’s why we don’t see the Fed balance sheet exploding even though China and Japan have accumulated trillions in dollar FX reserves.

In the case of the ECB though, the corresponding entry seems to grow every week by €10-15bn. That probably means that the corresponding central bank prefers to keep its euro assets in a reserve account in the ECB and not invest them in fixed income assets (although it is possible that the actual assets accumulated are even larger and a part of them has already been invested). Not having an asset class which is considered safe by central bank reserve managers is another indication of the current troubles of the Eurozone, the fact that an increasing liquidity preference can ultimately only be satisfied by a small set of risk-free assets, mainly ECB bank reserves (and probably German bunds). Personally, i find this vote of no confidence quite troubling.

On a related note, Bundesbank’s balance sheet for May shows a large increase in ‘liabilities to non-euro area residents’ of €37.8bn, which basically corresponds to the total increase in ECB liabilities on the same category. So it seems that euro outflows are actually happening from Germany, something clearly negative.