Deposit Flight from euro zone periphery to Germany

In August, Claus wrote a piece questioning the concept of a capital flight out of the euro zone and into US dollar assets due to the sovereign debt crisis. He quoted from a piece by Simon Ward that stated:

Scott Grannis, for example, argues that US money demand has been boosted by massive capital flight from the Eurozone as investors anticipate a break-up of the single currency. The US money supply gain, however, has not, to date, been fully offset by Eurozone weakness – G7 monetary growth, therefore, has risen. Eurozone figures for July, released next week, could conceivably change the story but would need to show a large decline to offset US strength.

The Grannis theory of a huge capital inflow to the US from Europe, in any case, is inconsistent with the stability of the euro / dollar exchange rate in recent weeks.

Rob Parenteau commented to me the next month that:

I am willing to wait for September results, but I think the answer is clear in the August money stock results. International macro 101 says the foreign exchange rate, not money supply, reflects changes in capital flows from shifts in portfolio preferences. Some investors do not remember this and end up concocting all kinds of stories about "liquidity" sloshing around, but this does not stand up to analysis.

Nevertheless, we still should get euro zone bank loan growth contracting as Q4 rolls on though, but not for ‘deposit flight out of euro zone’ reasons (at least until Greece officially defaults on interest payments).

The data have since shown that this deposit flight out of the euro zone into the US just isn’t happening.

But what about intra-euro zone deposit flight? Here’s a chart from the Council on Foreign relations that suggests this could be a story supported by the data.

The CFR commentary to the graph is:

The eurozone leadership is finally coming around to accepting that a major continent-wide bank recapitalization program is necessary. Germany wants each country to take care of its own banks. This approach could buy time, but it won’t work for long. National bank backstops are untenable in a common currency area, as each sovereign has its own credit risk profile. Depositors will simply flee toward the better backstops. This can already be seen in the correlation between bank deposits in Germany and the PIGS (Portugal, Ireland, Greece, and Spain). Before the financial crisis, those deposits were tightly correlated, as shown in the graphic above, but over the past two years the correlation has flipped – deposits are fleeing the PIGS and flying into Germany. A stable eurozone banking system will require a unified regulatory, resolution, and rescue regime.

Source: Eurozone Bank Deposits Are Fleeing for Germany


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.


  1. David Lazarus says:

    Making the ECB responsible for all banks could eliminate the risks with the sovereign, when the problems lie with banks. This would definitely end the problem for France and Italy. This might not be popular with some of the other nations. There needs to be a separation of the issues. Most of the problems lie with the banks.

  2. fredw says:

    Ed , are you aware of whether a similar deposit flight has occurred between Belgium and Germany ? Thanks in advance.

    • David Lazarus says:

      I would imagine that any flight has been towards Luxembourg. Luxembourg was the location of choice for german tax dodgers years ago until the German government clamped down on it. Plus much closer for Belgians to open up accounts in Luxembourg. I have no evidence either way but logic would give Luxembourg an advantage. It also depends on the local deposit insurance laws. I doubt that the majority of Belgians have so much money that they need to worry about such things. For example the UK deposit insurance scheme covers £85000 yet the average UK saver only has £2205 in savings. So unless there was a withdrawal of deposit insurance most would be unaffected.

    • Fred,

      I haven’t heard of any deposit flight from Belgium. I know that deposit flight is rumoured to have occurred from all of the periphery countries, Portugal, Ireland, Italy, Greece and Spain.

      Here are a couple of articles from Credit Writedowns mentioning it:

      • David Lazarus says:

        Quite frankly I am surprised that the state of Belgian banks is not up there with that of the peripheral banks. Though that would also explain why there has not been a capital flight either. Though during the last crisis in 2007 when two big UK banks were in trouble there was no additional account closures and little in the way of account transfers. The only bank that suffered a bank run and that was because of fears that they would not be covered. It was large account holders who panicked because they would not be covered.

        An additional factor is that there are expectations that the periphery will exit the eurozone which would impose huge losses on those whose finances remain in the periphery. Those with liquid assets are getting them out of the periphery. That is unlikely with Belgium, hence no capital flight.

        • Yes, the capital flight is centred around eurozone exit and devaluation in my view, meaning people are worried as much or more about their money getting the same treatment that Argentinean bank customers got 10 years ago as they are about the soundness of an individual bank. It’s a wholesale flight from a national banking system more than from an individual bank. So, since Belgium will likely not exit from the eurozone unless it breaks up entirely, there is less worry about that issue.

  3. fredw says:

    Thanks for your thought David !