Both the goods and services balance have improved significantly with the general current account deficit (Jan- June) shrinking from €24.57bn in 2011 to €17.13bn in 2012 or around 1.6% of GDP. I still maintain my projection of an annual current account deficit of less than 3% of GDP during 2012.
On the other hand, the financial account continued its deterioration:
Compared with a positive figure of €22.46bn (excluding BdE) in 2011, the numbers so far show an exit of €219.82bn, or more than 20% of GDP. Portfolio investment is negative €77.49bn, while ‘Other investment’ (mainly loans) is negative by an alarming €154.29bn, marking the high risks of the Spanish banking system.
The detailed breakdown of foreign investment if Spain is as follows:
What is positive is the fact that portfolio investment outflows in government securities appear to have stopped, The main driver of outflows is the banking sector with both portfolio (bonds) and other investment being highly negative (-€14.22bn and -€22.77bn in June). A negative development is the fact that portfolio investment in ‘other resident sectors’ shows large negative outflows since March, with June posting the largest number for 2012, at -€7.15bn.
Recent monetary developments in Spain (for July) seem to suggest that retail investors have also started moving their deposits abroad. MFIs and other resident sectors still have very large foreign liabilities (in the form of bonds and deposits although available data are only available till 2012Q1) . Unless bank resolution (through the bad bank scheme and recapitalization) happens quickly, outflows will continue. The macro risk is quite significant (since Spain is in a deep recession) while bondholder involvement in recapitalizations obviously makes matters worse.
Overall, it looks like foreign investment is quickly replaced by Spanish banks using BdE funding to acquire government securities and pay their own debt with the former being supported by official loans through the EFSF.