Non-resident investors leaving Spain and Italy, Fitch says

The proportion of Spanish and Italian public debt held by non-resident investors fell in the first quarter of 2012, according to a release published today by Fitch Ratings.

According to the rating agency, cheap money of the European Central Bank (ECB) has replaced international institutional investors.

“The pace of the withdrawal by non-residents quickened in Spain, where we estimate that non-resident holdings of Spanish public debt, excluding ECB holdings under the Securities markets programme, dropped to 34% in Q1 12, from 40% at end-2011. It has been dropping steadily from over 60% in 2008,” the company said.

In Italy, the drop in private sector non-resident holdings has followed a different path. Total outflow in Italy has been lower than in Spain, with non-residents only accounting for around 50% of bondholders in 2008 and the outflow did not start until Q3 11.

Fitch believes the high risk of outflows in Spain and Italy will continue in the coming quarters, until either a more stable base of foreign investors with higher risk appetite is reached, or economic prospects for Spain and Italy improve.

Outflows have been offset by significant flows within the eurosystem of central banks, reflecting increased use of central bank liquidity by Spanish and Italian banks.

According to Fitch, the ECB money has fulfilled a triple role of supplying banks with funding, enabling them to increase purchases of sovereign debt to replace non-resident outflows and supporting the balance of payments of these economies.

“If the outflows continue, we see the ECB, and the European stability mechanism if needed, as willing and able to prevent self-fulfilling liquidity crises and buy sovereigns’ time to implement consolidation and structural reform, which should encourage institutional investors to return.

“As we have previously said, the European Financial Stability Fund/ESM has the capacity to act as an ‘anchor investor’ in new sovereign bond issues, and potentially to buy bonds in the secondary market to counter these private capital outflows,” Fitch said.

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