Foreign private investors were in full retreat from periphery markets in 2011 and through the first half of 2012. For example, as shown in the table below, foreign investors sold off €224 billion in Spanish assets over this period.and
More detailed data would show that the pullback was largest for portfolio assets, a broad category that includes sovereign bonds and notes and private security instruments other than derivatives.net foreign purchases of listed equities to the Bank of Spain's foreign equity portfolio liabilities column for essentially the same class of assets.
So, the question is, 'How do 9 billion euros find themselves transformed into 49 at the hands of the economics profession?' And the answer is to be found on pages 13 and 14 of the Bank of Spain's methodological guide. Here's the money quote:
The financial accounts reflect the balances of financial assets and the corresponding transactions among the residents of the Spanish economy and between the latter and residents of the rest of the world, as well as other financial flows, which are changes in the value of the financial assets and liabilities that appear in the balance sheets of the various agents that do not arise from transactions, such as changes in asset prices (revaluations), accounting reclassifications, changes in the sector in which institutional units are classified, etc.Note the construction of the sentence. First in line is 'balances of financial assets and the corresponding transactions', then followed - almost as if an aside bordering on irrelevant, 'as well as other financial flows, such as changes in asset prices'. The implicit and explicit order of importance is backwards because what the financial account actually measures is the market value of asset holdings in the period in question. Beyond evidently minor changes through actual transactions, the equity column is merely a report on the net asset value of a foreign-owned stock portfolio.
Not that we're suggesting that accounting principles should be altered - after all, everything has to sum out to zero, but to see adult economists referring to a bookkeeping event which must be treated as being made up of real transactions as if it were a report on actual movement of capital reflecting a crisis in investor confidence... that doesn't cut it.
Assuming that the economics profession will never be prohibited from remarking on what goes on in the real world, one structural change that might produce more reasoned commentary (and, God forbid, policy) might be to rephrase the above definition.
How's this sound?
The financial acounts reflect the market value of foreign securities holdings and, to an extent bordering on insignificant, actual financial transactions.Next, we'll try to deal with the bond market version of the same.