Recent developments in cross-border capital flows in the euro area

Between 2008 and 2012, a substantial proportion of cross border financial flows in the euro area was taken over by official financing provided by central banks, as shown by the emergence of the socalled TARGET2 balances, or by governments in the context of financial assistance programmes. They were an important avenue through which debtor countries with balance of payments in distress managed the 'sudden stop' in private capital inflows that they were experiencing at the time. This section uses balance of payment data to look in depth at developments in financial flows since the European Central Bank (ECB) announced its Outright Monetary Transactions (OMT) programme in the summer of 2012. The data show that, since then, net private financial flows have resumed while official flows have in general come down. Private capital outflows have once again been the main counterpart to the current account surplus in Germany. After having experienced massive private capital flights during the peak of the crisis, debtor countries have seen either a return of net private inflows (Spain) or at least, a marked slowdown in net private outflows (Greece, Portugal). To a lesser extent, private capital net inflows have also returned to Italy. Overall, the partial replacement of official funding by private capital can be interpreted as a sign of regained confidence in the euro area. When looking at gross inflows and outflows, however, the picture is less benign and there are still signs of financial fragmentation despite the overall narrowing of the sovereign bond spreads. The strong dynamics of cross-border financial asset acquisition observed in pre-crisis years has not returned yet and both debtor and creditor countries seem to remain in "deleveraging" mode. In Germany, private net outflows appear to mainly reflect a marked decrease in debt inflows rather than an actual accumulation of foreign assets. In Spain, Italy, Portugal and Greece, the strong decline in foreigners' purchases of their debt, which was a main feature of the crisis period, has mostly come to an end but the trend has not reversed.