Chart of the Day: The drain on Spain...

Credit: Mike Foster / Financial Times

Whisper it softly, but accelerating capital flows out of southern Europe probably gave Mario Draghi all the excuse he needed to authorise the European Central Bank’s use of unlimited monetary firepower to purchase stressed sovereign bonds in the eurozone.

Darren Williams, senior European economist at asset manager AllianceBernstein, has pointed out in his latest strategy note that this year Spain alone has suffered a €220bn capital outflow.

Of this total, €84bn comprised the sale of Spanish securities by foreigners; €91bn was withdrawn from loans or deposits by overseas banks, and banks in Spain shifted a further €61bn.

The sums involved are equal to 41% of Spain’s gross domestic product, seriously eroding the cumulative inflows Spain has enjoyed since 1999, as the attached graph illustrates. Spain was heavily depended on inflows prior to the credit crisis to pay its way in the world. To make good the loss, the Bank of Spain has been forced to borrow €237bn. Private sector risk has shifted decisively onto the public sector balance sheet.

The terrible thing about capital flight is that it almost invariably accelerates unless action is taken to restore confidence. Which was why the UK government had to step in to rescue Northern Rock as soon as customers started queueing to withdraw funds. And so on, and so forth.

As Williams says: “It is hard to see how policymakers can prevent past capital flows into Spain from reversing and spilling onto their own balance sheets, except by soothing investor concerns. Perhaps this is one reason the ECB is now ready to intervene more aggressively."