THE SATURDAY ESSAY: Why the eurozone’s capital incontinence is the beginning of the end

The eurozone ‘is haemorrhaging investment’ – Brussels source

“Capital outflow from eurozone especially pernicious” – UBS analysts


In trying to calm nerves, the ECB’s denial of Cyprus Template Syndrome is acting as a confirmation of what unofficial but well-informed sources already know: the investment seeds the eurozone so desperately needs for recovery have been blown far, far away by the hurricane of mistrust following the EC’s Cyprus energy grab. Not only is this going to get worse, it has ensured that the first domino of disaster is about to hit the second. The timescale remains, as ever, uncertain: but its duration just got decimated. The Slog analyses the ‘unforeseen consequences’ of depositor theft.

Mario ‘No Shadow’ Draghi arose from his coffin last Thursday afternoon for a grudging attempt at eurozone damage limitation.

“Cyprus is no template, Cyprus is no turning point in euro area policy,” said Mr Draghi. “I am absolutely sure that the chairman of the Eurogroup has been misunderstood.” He was of course referring to Dutch stream of consonants Jeroen Djisselbloem’s blasé agreement with the concept of stealing our money going forward. It had all been a terrible mistake, allegedly: there would be No More Nicosias, watch my lips.

I spoke to a representative cross-section of dealers, traders, wealth managers, and bond market opinion leaders afterwards. I also spoke to four expats in France, an Italian, a Spaniard, two Americans and three Greeks. None of them believed a word of it. All of them were convinced that, almost certainly, Draghi was trying to stem a capital flight crisis. I have been warned by a Brussels contact that the leakage of euro-investment monies to elsewhere after the Cyprus Heist has been “disastrous”. But I don’t as yet have any hard evidence about the total picture. (If anyone does, then is the place to send it).

I can tell you this, however: a Singaporean banker to whom a Slogger kindly introduced me earlier in the week said he had “never been busier” handling panicked demands to open investment and chequing accounts. Another institution in Singapore dealing in accounts larger than $5million had a record week for takings from the eurozone. And the Californian office of a senior banking firm saw “a mega-spike” in ezone euros switching into Dollars.

If all this feels too anecdotal and sample of one, think again: UBS Research Analyst Gareth Berry is happy to confirm the trend in full based on the bank’s own monitoring: “We expect that the theme of capital flight out of the Eurozone will continue to run for some time in the wake of the Cyprus bailout,” he says, “capital flight in the form of investment outflows is even more pernicious.”

Supporting The Slog’s ECB website observations, Berry adds:

“As timely data is still rather difficult to come by, we used our Equity Flow monitor from last week to see if asset managers are now liquidating underlying investments in the Eurozone, especially taking into account that our FX Flow Monitor has been showing such trends for several weeks. The Eurozone suffered the most out of all G10 markets we track, but the distribution of selling was even more troubling – ie,  for non-Eurozone based investors it was one way: the US and UK both registered strong inflows last week but almost all of the buying came from their own clients leaving the Eurozone. If past history is anything to go by, the Eurozone’s funding gap may widen further and it’s the real economy, beyond the banks, that will suffer.”

However, the thing is, nobody outside the self-appointed élite knows the official numbers. And this is a bit naughty of the ECB, because it’s supposed in theory to publish some indicative figures on this every week. I’ve yet to read a single mainstream media article that’s noticed just how far behind on this the ECB’s website is. Somehow, Mario Draculaghi managed to get through his monthly report two days ago without being asked a single question about it. He said his forecasts for Q 3&4 2013 were on target “but subject to downside risks”, and that “all incoming data will be monitored closely”. In short, he said nothing whatsoever. Signor Draghi didn’t have to: he has no boss, he has no regulator, and he is not democratically responsible to anyone. But the idea of a Q 3&4 recovery in an investment desert is complete tosh.

Look at the schedule of media releases for the coming week, and you will see that eurozone capital flow trends are absent. The next Governing Council meeting of the ECB in Frankfurt is not until 18th April. The last eurozone risk dashboard was published on March 23rd. The April stats overview shows no data beyond Q3 2009.

In theory, The Big One is the euro area monthly balance of payments and quarterly international investment position to be issued on 19th April. However, that will cover up to the end of February…..long before the alleged capital flight panic got under way.

The reality, as I understand it, is that we are not going to know anything about the eurozone official capital investment position until mid July. And it gets more curiously inconsistent the more one digs into it: the eurozone balance of payments data is known already up to the end of January: but the eurozone international investment stats stop at the end of 2011. We don’t have a single published stat on this for 2012.

Clearly, the ECB’s inner sanctum (and, I’d imagine, the Chancellery, the Elysée Palace, and the Big Beast central banks) will know these numbers almost up to date. My Brussels source says yes, of course they know. He doesn’t know the details: he just alleges that the eurozone “is haemorrhaging money”. He admits that he is simply peddling inside gossip; but I believe him when he says he is sure it’s right. And the UBS monitoring analysis supports his contention entirely.


It would be hard to overestimate the importance of this, a combo of informed gossip and hard data that reflect intuitive common sense. It isn’t conclusion jumping, it’s educated guesstimating: following the blatant theft from depositors in the Cypriot banking system, it should be clear to even the most anally pedantic commentator now that a major exit of vital investment capital from the eurozone is under way. Expect mendacious drivel from Olli Rehn, Tubby Barroso, the key eurogroup players, and it’s incompetent flappy-mouth Dijsselbloem: expect it, and ignore it. The cat is out of the bag, and unless the eurocrats can find a way to stop the outflow and/or replace it, not only is their precious currency project doomed: the eurozone economy will collapse at every point of the compass.

For the debtor eurozone countries, the obvious question to ask from here on is this: what on earth is the point of staying inside a millstone currency? Not only will it price them out of every export market in the world, loss of business investment trust will be swiftly followed by loss of debt bond trust…..the debt mountain ClubMed has will become a beanstalk to infinity they cannot possibly climb.

I suspect the key Sovereign in this context is Italy. That the unofficial certainty of capital outflow is now obvious plays straight into the hands of emerging radical voice Beppo Grillo. This too is clearly evidenced in the desperate attempts by Mario Monti there to cobble together (and force through with Presidential help) a technocratic administration to block further elections. But throughout the formerly supine ClubMed, local attitudes are hardening: Portugal’s Constitutional Court has ruled that the planned austerity measures there are  unconstitutional, thus at a stroke derailing the Troika’s strategy. The Court threw out cuts in state pensions and public sector wages, potentially forcing Prime Minister Pedro Passos Coelho to negotiate alternative measures with  the country’s international lenders.

In Greece, we have a bailout schedule that is really nothing more than a debt volcano spewing out more suffocating fumes and lava with every year. In Cyprus, a non-economy stabbed in the neck by frenzied rapists. In Italy, a growing tide of public antipathy towards the eurozone. And now in Portugal, a poke in the eye for the Troikanauts from the lawyers. The euro project faces a democratic crisis in southern Europe, and support for those ridiculing it is on the rise throughout the EU . Almost every ClubMed sovereign would today, technically, be better off defaulting on its debt.

For Brussels and ECB-Frankfurt, the game plan now must be to stifle any attempt at new elections in the South. I cannot see how this could succeed: there is no effective eurozone ‘standing army’ to enforce financial repression, and even if there was, the growing rift between Paris and Berlin would ensure the blockage of any such measures.

For Berlin, the pressure from hysterical anti-bailout Bankfurters is increasing and must soon become crucial to this inter-city power struggle. In a thundering lead-article yesterday, its mouthpiece the Frankfurter Allgemeine Zeitung wrote:

‘The European heads of state and governments are sitting in a burning house haggling over the total sum they will have to rustle up for the water damages from putting out the fire. The reproach that they have lost contact with the citizens doesn’t ring true: the fact is, they never had any to start with. The system we live in neither provides for nor admits any legitimate representation for the citizens of Europe.’

Terribly stirring and all that, but the FAZ agenda remains “let’s GTF out of the euro now”. Angela Merkel may feel smug about public anger in Germany about ClubMed depictions of her as a Nazi control-freak, but still 41% of them don’t believe she can protect German savings. One bad election result and one default in the eurozone will put her under irresistible pressure to quite the common currency.

For Paris, Greek default remains the nightmare which dare not speak its name. Embroiled in an offshore banking scandal (Le Monde’s headline this morning is ‘Two French banks fingered’) Hollande found himself depicted as a lame duck on the front page of almost every newspaper yesterday. But whatever Credit Agricole and BNP Paribas have been up to, behind the headlines the French President knows this crisis for him is as nothing compared to the crisis rapidly heading for the country like a runaway truck. Ironically, Le scandale d’offshore is a distraction which may suit some of the Elysée’s advisers down to the ground.

If Berlin starts to make noises about leaving the eurozone – suggesting default as the route for Athens – then the French banking system is dead in the water. Just one ‘bad’ ClubMed election result would be enough to send French debt bond yields heading for the stratosphere. Hollande has, in reality, done little to rein in French State spending and employment: that which he had done is far too little far too late. There is now no way back for Paris, and I suspect the ENAs know it.

For Wall Street, beyond the standard MSM reassurance the growing fear is that two outcomes are likely. First, contagion from eurozone economic flatlining in Q 3&4 will openly reverse Obama’s fake recovery. Yesterday’s NFP Report continued a string of US data output falling short on hope: only 88,000 jobs were created in March, far less than the 190,000 expected. The markets responded with nervous selling of equities. The Great QE Stock Market Wily E Coyote illusion is about to get into serious trouble.

Second, it is fine to get your investment deposits out of the eurozone, but impossible to reverse one’s previously crazy bets. Again, an anarchic eurozone member election could be enough to trigger trouble for a major US bank: confirmed capital flight and economic standstill data from Europe would make one at least almost inevitable.

The first domino is no longer wobbling: it is about to hit the second.


The twelve dominoes of Crashmas

Cyprus has turned out, against all the odds, to be the first domino to head towards the second domino. That Number Two will be the eurozone bond market going from sick to dead. Only events can dictate the exact order of dominoes after that one. But there follows a sensible attempt to suggest one.

The third will be the release (0r leak) of official capital flight figures from Brussels. The fourth will be a consequent acceleration of capital flight. The fifth will be the release of Q3 eurozone economic data.

The sixth will be a Chinese export slowdown. Few people grasp this, but the EU represents 16% of all Beijing’s exports – just one percentage point behind the US.

The seventh will be Berlin backing away from further involvement, while maintaining a vice-like grip over Cyprus. The eighth a Greek default alongside Italian political stalemate. The ninth a chaotic German election. The tenth a major French banking collapse. The eleventh a banking sell-off on Wall Street, and the Dow starting to slide as the White House mirage fades.  The twelfth….the hyper-acceleration of a gold rush as global stockmarket confidence implodes.