Tuesday, 17 March 2009

$1 Trillion "Run on Britain" Disclosed

The Independent ran 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 About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion.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.

Source: Tyler Durden

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