Monday, March 9, 2009

$1 Trillion "Run On Britain" Disclosed

The Independent running a piece that seems to have fallen through the cracks: based on the latest statistical release from bank of England, the period between the end of the spring and the end of 2008 saw a $1 trillion exodus of "monies held in the UK on behalf of foreign investors."
Some $597.5bn was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5bn haemorrhaged in the second quarter of 2008 – a record. About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion. This is by far the largest withdrawal of foreign funds from the UK in recent decades – about 10 times what might flow out during a "normal" quarter.
The Independent concludes correctly "The revelation will fuel fears that the UK's reputation as a safe place to hold funds is being fatally compromised by the acute crisis in the banking system and a general trend to financial protectionism internationally."

While one could argue that there is little downside at this point in British capital markets, a full blown downgrade of its sovereign credit rating which many speculate could be mere days away would only perpetuate the capital outflows and terminally destabilize the eurozone (of which the UK along with Germany are unfortunately the strongest members). The article continues:

The Bank of England said that there had been a large fall in deposits from the United States, Switzerland, offshore centres such as Jersey and the Cayman Islands, and from Russia.

Paranoia that the UK could follow Iceland into effective national insolvency and jibes about "Reykjavik on Thames" will find an unwelcome substantiation in these statistics – which also show that stricken British banks are having to repatriate similar sums back to Britain. This is scant consolation for the authorities, however, as it means the UK and sterling are, like some emerging markets and currencies, suffering from a flight of capital. By contrast some financial centres and currencies – notably the US dollar and the Swiss franc – are enjoying a boost as "safe havens" in a troubled world.
Of course a strong dollar tends to do miracles for the trade balance of the U.S., however as the last time the U.S. exported any actual relevant products (let alone those fabulous Detroit moving contraptions) was some time in the 20th century, this is likely the last thing on economists minds in a world where the U.S., whose CDS trades at an 8% implied probability of default in 5 years, is considered the safest haven.

(hat tip reader Martin) Sphere: Related Content
Print this post

15 comments:

Advant Guard said...

"destabilize the eurozone (of which the UK along with Germany are unfortunately the strongest members)..."

Did the UK adopt the Euro while I wasn't looking? Is the Pound Sterling gone already?

Tyler Durden said...

of course not. but UK provides bulk of implicit support

Daniel said...

I believe the US is the world's largest capital goods exporter. Things like heavy machinery, jet engines, etc. I could be wrong though.

Ian said...

Strong dollar is a bad thing for US exports

Daniel said...

Good for the nominal trade balance though.

Olivier Travers said...

@tyler can you elaborate on "but UK provides bulk of implicit support"?!

@daniel aren't Germany and Japan way ahead?

Anonymous said...

Where did the money go? Last Septmeber there was a run on US banks, but I never did learn where the money went that time either?

Seriously, where do the funds go when there's a run on the US or the UK financial systems?

Anonymous said...

Thanks for the daily dose of sea sickness. How is gold only $900 and some change? The mind boggles...

kfunck1 said...

Has there been a new ratings agency report issued putting the UK on watch or something, or are you just generally speculating based on the amalgam of current events (a la Lloyds and QE)? I'm not disagreeing, just didn't know if there was a specific report. That is going to be an uglllyyy day when it comes.

Tyler Durden said...

no rating watch, mere speculation. in reality even a downgrade watch would create irreperable harm so i would imagine it is a last ditch action, but with the RA's nobody know anymore

kfunck1 said...

No doubt, just making sure I didn't miss something huge like that. If HSBC comes crawling for support in the next few months (likely?), that could be the tipping point as far as ratings go. Not that there aren't a million other things that could do it (any EU boom care of Ukraine, Romaina, Estonia,etc.), that's just one that comes to mind. I really enjoy reading your blog Mr. Durden, the analysis about the utility company was fantastic information, thanks for your insights.

Paul W said...

Brad Sester over at CFR is covering this topic. See post with links to good research:

http://blogs.cfr.org/setser/2009/03/08/the-shadow-financial-system-%E2%80%93-as-illustrated-in-three-new-papers-that-cut-through-london%E2%80%99s-fog/#more-4857

Anonymous said...

"Of course a strong dollar tends to do miracles for the trade balance of the U.S., however as the last time the U.S. exported any actual relevant products (let alone those fabulous Detroit moving contraptions) was some time in the 20th century, this is likely the last thing on economists minds in a world where the U.S., whose CDS trades at an 8% implied probability of default in 5 years, is considered the safest haven."

Check out the list of products the US exports in large numbers before posting stupid "facts" like this. The numbers speak for themselves. They are often products that no one else can make.

Junior said...

Anon -

You said "They are often products that no one else can make."

U.S.: #1 exporter of creative financial instruments and debt.

good call.

none said...

UK part of eurozone?
no, "but UK provides bulk of implicit support"

implicit support?