Since BdE updated the Spanish NIIP with data for 2012Q2 i ‘d like to update my analysis on the subject after the September Economic Bulletin comments:

Although the drop in the overall Net Investment Position is only a marginal 2.2% (-€960.3bn compared to a peak of -€982.1bn in 2011Q2) what is very impressive is the very large swing in the net position of BdE, from +€39.5bn to -€314.9bn, a change of €354.4bn since 2011Q1. This is basically matched by the corresponding changes in portfolio investment (€210bn, from -€672.4bn to -€462.5bn) and other investment (€146.1bn, from -€342.1bn to -€196bn) while FDI is unchanged.

As a result, the net position of BdE is now 1/3 of the negative NIIP of Spain. Since outflows in both portfolio and other investment are continuing, it is probable that by the end of the year both positions will have dropped even further and BdE will account for probably half of the Spanish NIIP. The consequences will be:

  1. Net costs on external net liabilities will be based on the ECB MRO rate (since Target2 liabilities pay the MRO rate to the ECB), limiting income outflows in the balance of payments.
  2. Net Spanish liabilities will be towards the official sector, especially if a Spanish bailout+OMT program goes through. In a sense, Spain will be firewalled while its interest and principal payments will be subject to political decisions in Euro summits and ECB governing councils.

In terms of foreign exposure, the Eurozone has managed to slowly move risks of PIIGS debt to the official sector even though the corresponding capital flows were enormous, a task that was made possible due to liquidity provided by the ECB. How governments will handle these risks is an open question.