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3 THE FINANCIAL ACCOUNT AND INTERNATIONAL INVESTMENT POSITION IN 2010

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BANCO DE ESPAÑA 41 THE SPANISH BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION, 2010

3 THE FINANCIAL ACCOUNT AND INTERNATIONAL INVESTMENT POSITION IN 2010

The Spanish economy’s net borrowing continued to fall in 2010, to 3.9% of GDP, 0.9 pp

down from 2009, owing mainly to the drop in investment, since, in GDP terms, the na-

tional saving rate remained around the previous year’s level. As a result, in 2010 the Span-ish economy had to raise fewer funds abroad to meet its financing needs. Although the

correction in the external deficit was interrupted during the opening months of 2011, ow-

ing to the increase in the energy and income deficits, the projection for the year is that the

process will continue, albeit at a slower pace than in previous years.

In 2010 financial markets were severely affected by the euro area sovereign debt crisis.

The most extreme bouts of distress stemmed from the Greek fiscal crisis (between May

and June 2010) and the collapse of the Irish banking system with its budgetary implica-

tions (between November and December 2010). In 2011 the sovereign debt crisis spread

to Portugal and, in mid-April, it flared up again in Greece. Spain was affected considerably

by the uncertainty concerning the extent of the worsening fiscal situation, the doubts

about its capacity to create jobs and its long-term growth, and the stability of a segment

of its banking sector1. The tensions in the euro area financial markets led to a tightening of

Spain’s financing conditions on the wholesale markets, with higher risk premia and diffi-

culty in borrowing from abroad at the height of the uncertainty.

In this environment, interbank rates and, particularly, long-term government debt yields rose

during the year. The average return on Spanish Treasury bonds with maturities of up to ten

years stood, in December 2010, at 5.4%, up from 4% in January, while the spread over their

German counterpart rose above 240 bp (70 bp In January), in a context of falling yields on

the German Bund, which was seen as a safe haven. On average over the year, yields on

Spanish ten-year government debt remained at relatively low levels (below 4.3%), while the

annual average yield on short-term debt fell to a record low (see Chart 3.1). During the open-

ing months of 2011, short-term rates continued to rise and yields on long-term Spanish

government bonds fell, along with the spread over the German benchmark, to stand around

190 bp. Notwithstanding, in mid-April renewed tensions in sovereign debt markets again

pushed Spanish bond yields higher (up to 5.3%), and the risk premium climbed back above

200 bp. Notably, in 2010 yields on Spanish non-financial corporations’ debt instruments

rose more moderately than on government debt. The financial tensions also depressed

stock prices and the value of the euro. European authorities and national governments

adopted a raft of measures to address this new phase of the crisis2. In the case of Spain,

these included a more determined fiscal consolidation effort and the adoption of structuralreforms and banking sector restructuring measures geared to enhancing the transparency

and soundness of the sector. This response limited the impact of the effects of the crisis on

the Spanish economy following the summer and enabled Spain to decouple itself from

those countries most affected by the financial tensions. Thus, the Portuguese crisis in 2011

3.1 Overview

1 In the case of general government, market concern was accompanied by downgrades in the credit rating of

Spanish sovereign debt (S&P lowered its rating from AA+ to AA in April 2010, Fitch from AAA to AA+ in May, and

Moody’s from Aaa to Aa1 in September 2010, and then to Aa2 in March 2011).

2 In the case of monetary policy, the response consisted of non-conventional measures. The situation in the markets

meant that the Eurosystem extended its liquidity-providing operations conducted as tenders with full allotment at least

until the cut-off date for this chapter. The covered bond purchase programme –including mortgage covered bonds–

which was launched in 2009, ended in June 2010. However, the strong tensions in some government bond markets

and their negative impact on the transmission mechanism led to the introduction of the Securities Market Programme,which includes the sterilised purchasing of government debt on secondary markets in those countries most affected by

the tensions. For more information, see Chapters 1 and 4 of the Banco de España’s Annual Report , 2010.

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did not greatly affect Spain’s risk premium and the recent worsening of market perception

on the sustainability of Greek government debt has not had the same impact as similar

bouts in 2010. Stock markets, including Spanish ones, tended to rise in the first few months

of 2011, amid significant volatility, although this trajectory was interrupted by the events in

Greece. Finally, the euro strengthened against the dollar in the first quarter of 2011.

In this setting, the net issuance of fixed income by resident sectors contracted consider-

ably in 2010 (61%), against the background of tightening financing conditions. The declinein the net issuance of general government was 40%, while monetary financial institutions’

(MFIs) net issuance declined by 80%. By contrast, the net issuance of non-financial cor-

porations, which were less affected by the uncertainty in the financial markets, increased.

For their part, securitisation vehicles3 and the non-monetary subsidiaries of MFIs made net

redemptions. Finally, net issuance of equities increased strongly (45%), although this in-

crease was a consequence of two specific transactions4.

SOURCES: ECB and Banco de España

a Three-month interbank market interest rates..

b Ten-year government bond yields..

0

20

40

60

80

100

120

140

160

00 01 02 03 04 05 06 07 08 09 10 11

IBEX-35 DJ EURO STOXX S&P 500 NIKKEI 225

Jan. 2000 = 100

INTERNATIONAL STOCK MARKET INDICES EURO EXCHANGE RATES

0

20

40

60

80

100

120

140

160

180

00 01 02 03 04 05 06 07 08 09 10 11

US DOLLAR YEN STERLING

Jan. 2000 = 100

0

1

2

3

4

5

6

7

8

00 01 02 03 04 05 06 07 08 09 10 11

EURO AREA USA JAPAN

SHORT-TERM INTEREST RATES (a)

%

0

1

2

3

4

5

6

7

8

00 01 02 03 04 05 06 07 08 09 10 11

EURO AREA USA JAPAN SPAIN

%

LONG-TERM INTEREST RATES (b)

INTERNATIONAL FINANCIAL DEVELOPMENTS CHART 3.1

3 Since the start of the crisis, these instruments had continued to be issued, although the asset-backed bonds were

acquired by the originators, since, as in other countries, they were used as collateral for ECB liquidity tenders. The

net redemptions in 2010 are explained by the persistent slackness of the securitisation market and the smaller

incentives for institutions to hold these securities because they had an ample volume of eligible assets available.4 A more detailed description of issuance by residents in Spain is available in Chapter 6 of the Banco de España’s

Annual Report, 2010.

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In total, the financial transactions between Spain and the rest of the world, excluding the Banco

de España, generated a net inflow of funds in 2010 of €27,719 million (2.6% of GDP, 1.6 pp less

than in 2009), which was not sufficient to cover the nation’s net borrowing (€41,430 million). As

a result, the Banco de España’s net assets vis-à-vis the rest of the world declined by €15,696

million (see Table 3.1 and Chart 3.2). In 2010, non-residents divested Spanish financial assets,

although not as intensively as residents divested assets issued by non-residents in an attempt

to overcome their difficulties in raising funds abroad owing to the sovereign debt crisis in the

2004 2005 2006 2007 2008 2009 2010

CURRENT ACCOUNT PLUS CAPITAL ACCOUNT BALANCE -4.2 -6.5 -8.3 -9.6 -9.1 -4.8 -3.9

FINANCIAL ACCOUNT BALANCE (a) 5.8 6.9 11.3 8.2 6.4 4.2 2.6

CHANGE IN EXTERNAL LIABILITIES (b) 18.2 24.6 25.9 22.6 10.9 6.2 -1.1

Foreign direct investment 2.4 2.2 2.5 4.5 4.8 0.6 1.5

Monetary nancial institutions -0.1 0.0 0.0 0.1 0.1 0.1 0.2

Other resident sectors 2.5 2.2 2.5 4.4 4.7 0.5 1.3

Portfolio investment 13.4 15.2 19.9 9.1 -2.0 4.7 -3.1

General government 2.7 0.3 1.4 -1.6 1.6 5.4 1.4

Monetary nancial institutions 5.9 6.2 8.3 3.6 -1.3 1.6 -2.0

Other resident sectors 4.8 8.8 10.2 7.0 -2.3 -2.2 -2.5

Other investment 2.4 7.1 3.5 9.1 8.1 0.9 0.5

General government 0.6 0.0 0.1 0.0 0.3 0.2 0.5

Monetary nancial institutions 1.8 5.6 0.4 7.2 6.9 0.7 -0.8


CHANGE IN EXTERNAL ASSETS (c) 12.4 17.6 14.6 14.4 4.5 2.0 -3.7Foreign direct investment 5.8 3.7 8.4 9.5 4.7 0.7 1.6

Monetary nancial institutions 1.6 0.1 0.6 2.9 0.6 0.5 -0.7


Portfolio investment 3.2 8.8 -0.4 -0.8 -2.0 0.4 -6.0

General government 0.1 0.5 1.1 0.6 0.2 -1.2 -0.6

Monetary nancial institutions 0.6 4.5 -3.1 0.3 0.7 0.8 -3.2

Other resident sectors 2.5 3.7 1.6 -1.7 -2.9 0.7 -2.3

Other investment 3.4 5.2 6.7 5.3 1.1 0.4 1.4

General government 0.2 0.1 0.0 0.1 0.1 0.1 0.3

Monetary nancial institutions 2.0 4.4 6.0 4.8 0.7 0.3 0.6

Other resident sectors 1.2 0.8 0.7 0.4 0.4 -0.1 0.4

Financial derivatives (d) 0.0 0.0 -0.2 0.4 0.6 0.6 -0.7

NET CHANGE IN EXTERNAL ASSETS OF BANCO DE ESPAÑA (e) -1.7 -0.2 -2.6 1.4 2.8 1.0 1.5

Of which:

Reserve assets 0.6 0.2 0.0 0.0 -0.1 -0.1 -0.1

Net assets vis-à-vis the Eurosystem -1.6 1.6 -1.3 2.7 2.9 0.6 0.9

Other net assets -0.6 -2.0 -1.3 -1.3 -0.1 0.6 0.6

MEMORANDUM ITEMS:

FINANCIAL ACCOUNT BALANCE INCLUDING BANCO DE ESPAÑA 4.1 6.7 8.7 9.6 9.2 5.2 4.1

Errors and omissions (f) 0.1 -0.2 -0.4 0.0 -0.1 -0.4 -0.2

BREAKDOWN OF THE FINANCIAL ACCOUNT OF THE BALANCE OF PAYMENTS TABLE 3.1

% of GDP

SOURCE: Banco de España.

a Excluding Banco de España.b A positive sign denotes an increase in liabilities, i.e. a capital inow.c A positive sign denotes an increase in assets, i.e. a capital outow.d Recorded net of netted out amounts and allocated, by convention, to the net change in assets.e A positive (negative) sign denotes a decrease (increase) in Banco de España foreign assets.f A positive (negative) sign denotes a receipt (payment) not recorded in another balance of payments caption.

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euro area. The net divestment of Spanish financial assets by non-residents amounted to €11,761

million, as against net investment of €65,231 million in 2009. This decline in non-residents’ hold-

ings of Spanish financial assets was concentrated in securities issued by the private sector,

particularly bonds issued by MFIs, mortgage covered bonds, asset-backed bonds and securi-

ties issued by non-monetary subsidiaries of MFIs. By contrast, non-residents continued to ac-

quire public debt and bonds issued by non-financial corporations. Divestments by residents

totalled €39,480 million, as against an investment of €21,054 million the previous year. These

divestments abroad by resident sectors were basically the result of sales of foreign bonds.

The stock of Spain’s net liabilities to the rest of the world, as measured by the international

investment position (IIP), fell by 4% in 2010 to €926 billion, representing 87.1% of GDP (down

4 pp from the previous year) (see Chart 3.3 and Table 3.2). This decline took place in spite of

the deficit balance on the rest of the world account, owing to the effect of the trend in financial

instrument prices and exchange rates on the value of external assets and liabilities (i.e. owing

to the valuation effect)5. This effect largely reflected the divergent trends in international and

Spanish stock market prices, the former being much more expansionary, which raised the

value of the assets of residents in Spain, while it reduced that of their liabilities. The incidence

of the depreciation of the euro’s exchange rate was less acute (see Table 3.3). The valuation

effect explains the reduction in the net IIP in portfolio investment and, to a lesser extent, the

improvement in the balance of foreign direct investment (see Table 3.4).

An alternative way of measuring Spain’s indebtedness to the rest of the world is to use gross

debt, which only includes those liabilities that generate payment obligations6. In 2010, gross

SOURCE: Banco de España

a A negative (positive) sign denotes an increase (decrease) in the Banco de España's net foreign assets.

b Excluding the Banco de España.

-150

-100

-50

0

50

100

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

NET CHANGE IN ASSETS OF BANCO DE ESPAÑA (a) NET BORROWING NCL - NCA (a)

2000-2010 PERIOD

€bn

FINANCING OF THE SPANISH ECONOMY CHART 3.2

5 In accordance with international statistical standards, the IIP values external financial assets and liabilities at the

market prices and exchange rates prevailing at the end of the reference period. Consequently, any changes in

the prices, expressed in domestic currency, of the assets that make up the IIP have a direct impact on the exter-

nal credit or debit position. Hence the change in the IIP between two points in time is determined not only by the

financial transactions between the residents of an economy and the rest of the world, which reflect the nation’s

net borrowing or net lending in that period, but also by the changes in the value of the financial instruments that

make up the stock of financial assets and liabilities (known as the “valuation effect”). In addition to these two

factors, there is a third one, the so-called “other adjustments”, which occasionally affects the IIP.

6 A country’s external debt consists of the amounts of all the liabilities to non-residents that entail future principal

and/or interest payments (all financial instruments, except equities and financial derivatives); accordingly, it isroughly equal to enforceable liabilities. In Spain, enforceable liabilities account for around 76% of Spain’s total

external liabilities. The rest is made up of contingent instruments, like shares and other equity.

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external debt fell by 2.8 pp of GDP, to stand at 164% of GDP (160% if the Banco de España

is excluded) (see Table 3.5).

Appropriate valuation of exposure to non-residents requires detailed analysis of the nature of the

external debt instruments. At end-2010 most of the debt was in the form of portfolio investment

instruments, particularly medium- and long-term bonds, and in other investment, while debt aris-

ing from inter-company financing transactions was much lower. As regards the original maturity

of the financial instruments, which is an indicator of the nation’s refinancing requirements, around

70% of the total external debt was long-term, a higher proportion than that of the euro area as a

-100

-50

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

NET ASSETS LIABILITIES

% of GDP

INTERNATIONAL INVESTMENT POSITION CHART 3.3


NET IIPNET IIP EXCLUDINGBANCO DE ESPAÑA

NET IIPNET IIP EXCLUDINGBANCO DE ESPAÑA

2008 -863.1 -914.0 -79.3 -84.0

2009 -960.1 -1,004.3 -91.1 -95.3

2010 -925.6 -955.9 -87.1 -90.0

VALUE OF STOCK (€bn) PERCENTAGE OF GDP (%)

INTERNATIONAL INVESTMENT POSITION. RECENT DEVELOPMENTS TABLE 3.2


VALUATION

EFFECT

AND OTHER

ADJUSTMENTS

LEVELS LEVELS % (b) LEVELS % (b)

2008 -863.1 -40.2 -100.2 60.0 1,359.1 18.6 50.0 -31.4 -2.3 2,222.1 58.9 150.3 -91.4 -4.2

2009 -960.1 -97.1 -54.6 -42.4 1,361.0 2.0 16.7 -14.8 -1.1 2,321.2 99.0 71.4 27.7 1.2

2010 -925.6 34.5 -43.4 77.9 1,361.2 0.1 -45.4 45.5 3.3 2,286.8 -34.4 -2.0 -32.4 -1.4

LIABILITIES

VALUE

OF

STOCK

CHANGE

IN

STOCK

TRANSACTION

VALUATION EFFECT

AND OTHER

ADJUSTMENTS

CHANGE

IN

STOCK

TRANSACTION

ASSETS

VALUATION EFFECT

AND OTHER

ADJUSTMENTS

NET (a)

VALUE

OF

STOCK

CHANGE

IN

STOCK

TRANSACTION

VALUE

OF

STOCK

RECONCILIATION OF CHANGE IN STOCK WITH BALANCE OF PAYMENTS TRANSACTIONS TABLE 3.3

€bn


a A (–) sign denotes a larger change in liabilities than in assets.

b Difference between the change in the stock and the balance of payments transaction, in terms of stock at beginning of the period.

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whole, which was around 50%.7 Moreover, nearly 90% of the gross debt was denominated in

euro, which tends to mitigate the foreign exchange risk. Again, this percentage appreciably ex-

ceeded that of the euro area as a whole, which was near 70%. However, the gross external debt

only reflects one facet of the exposure to external creditors, the sustainability and refinanceabil-

ity of which depend also on the magnitude of the enforceable external assets. The difference

between these assets and the enforceable liabilities, i.e. what is known as “net external debt”

amounted to 97% of GDP at end-2010 (70% of GDP in long-term instruments). 8

As in Spain, the financial transactions of the euro area9 were affected by the impact of the

sovereign debt crisis. As regards portfolio investment transactions, fixed-income securities

issued by residents in German acted as a safe-haven asset at times of greatest tension in the

debt markets. The financial turmoil also affected the recourse to the Eurosystem,10 which was

Q1 Q2 Q3 Q4

NET INTERNATIONAL INVESTMENT POSITION (A-L) -863 -960 -948 -907 -960 -926

Excluding Banco de España -914 -1,004 -990 -883 -980 -956

Foreign direct investment 1 12 16 27 34 39

Portfolio investment -604 -688 -667 -606 -663 -650

Other investment (a) -305 -327 -345 -317 -355 -347

Financial derivatives -6 -1 6 12 4 3

Banco de España 51 44 42 -23 20 30

2008 20092010

INTERNATIONAL INVESTMENT POSITION. SUMMARY TABLE 3.4

€bn


a Includes, primarily, loans, deposits and repos.

Q1 Q2 Q3 Q4

EXTERNAL DEBT 1,672 1,759 1,788 1,774 1,762 1,744

Excluding Banco de España 1,637 1,717 1,744 1,668 1,703 1,692

Foreign direct investment 157 175 181 183 183 184

Debt liabilities to aliated enterprises 92 101 111 116 116 117

Debt liabilities to direct investors 65 74 69 67 67 67

Portfolio investment 788 845 854 795 810 787

Other investment (a) 692 697 709 690 710 721

Banco de España 35 41 44 106 59 51

2008 20092010

SPANISH EXTERNAL DEBT

Breakdown by instrumentTABLE 3.5

€bn


a Includes, primarily, loans, deposits and repos.

7 See ECB (2010), “Recent developments in the gross external debt of the euro area”,Monthly Bulletin, May.

8 Although net external debt is an indicator of an economy’s indebtedness to the rest of the world, it does not include

foreign shares held by residents who could sell them to service their loans, which do form part of the external debt.

9 See ECB (2011), “Recent developments in the euro area balance of payments”, Monthly Bulletin, March.

10 The external assets of the euro area and US monetary authorities have, since end-2007, been conditioned by the

unconventional measures approved by the ECB and the Federal Reserve (there were also similar agreements with

the monetary authorities of other countries, especially the United Kingdom, Switzerland and Japan) in the form oftemporary reciprocal currency arrangements (swap lines) to provide liquidity to the money markets. These arrange-

ments, which initially expired in February 2010, have been successively extended to August 2011.

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greater in the economies most affected by the debt crisis. In addition, the uncertain economic

outlook constrained the upward movement of direct investment transactions. Finally, the gap

between economies with net debit and net credit positions narrowed somewhat. As regards

gross external debt, an international comparison shows that Spain’s debt is lower than that of

other euro area economies and that it decreased moderately in 2010 (see Chart 3.4).

Spain’s financial transactions with the rest of the world generated net capital inflows in the

form of portfolio investments, specifically fixed-income securities, and, to a lesser extent, of

financial derivatives. Transactions in other instruments generated net outflows of funds, the

quantity of which was larger in the case of other investment (basically loans, deposits and

repos) and particularly in short-term instruments (see Chart 3.5)11. In the case of foreign direct

investment (FDI), net outflows of funds were moderate and took place against a background

of notable recovery in FDI flows, both outward and inward. Finally, as to maturity, the financ-

ing of the Spanish economy was based on long-term instruments, specifically bonds, which

offset the net outflows of short-term funds (see Chart 3.6). In the opening months of 2011, this

feature persisted, since funds were raised through investment of non-residents in equities

and bonds, particularly those issued by general government, and in other long-term invest-

ments. By contrast, non-residents redeemed deposits and repos with resident MFIs.

In keeping with the composition and sign of the financial transactions carried out in the year

and with the aforementioned valuation effects, the decrease in the negative net IIP resulted

from the correction of the debit balance on portfolio investment and, to a lesser extent, from

the larger credit position in direct investment and the improved balance on financial deriva-

tives (see Tables 3.4 and 3.5). This development offset by far the increase in the debit position

in other investment. Against this background, portfolio investment lost relative weight in both

external assets and external liabilities, losing ground to direct investment in the first case and,

fundamentally, to other investment in the second case (see Table 3.6). These changes in in-

strument stocks, along with the behaviour of interest rates in the year on average and the

notable increase in dividends received abroad, allowed the deficit on investment income to

3.2 Breakdown by

investment

instrument

SOURCES: IMF, World Bank, OECD, BIS and national sources.

a b

-120

-100

-80

-60

-40

-20

0

20

40

60

00 01 02 03 04 05 06 07 08 09 10

PT FR DE IT ES

NET IIP

% oD

0

50

100

150

200

250

00 01 02 03 04 05 06 07 08 09 10

PT FR DE IT ES

GROSS EXTERNAL DEBT

% o D

NET INTERNATIONAL INVESTMENT POSITION AND GROSS EXTERNAL DEBT:

INTERNATIONAL COMPARISON (a) (b) CHART 3.4

11 Unless expressly indicated, Banco de España transactions and positions are excluded.

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a Excluding Banco de España.

b Financial derivatives are recorded net of netted out amounts and allocated, by convention, to the net change in assets.

-100

-50

0

50

100

150

200

250

300

00 01 02 03 04 05 06 07 08 09 10

FINANCIAL DERIVATIVES OTHER INVESTMENT

PORTFOLIO INVESTMENT FOREIGN DIRECT INVESTMENT

OUTFLOWS

Net change in assets (b)

€bn

-50

0

50

100

150

200

250

300

00 01 02 03 04 05 06 07 08 09 10

FOREIGN DIRECT INVESTMENT PORTFOLIO INVESTMENT

OTHER INVESTMENT

INFLOWS

Net change in liabilities

€bn

FINANCIAL TRANSACTIONS WITH THE REST OF THE WORLD, BY INSTRUMENT (a) CHART 3.5

-100

-50

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

FINANCIAL DERIVATIVES OTHER INVESTMENT PORTFOLIO INVESTMENT FOREIGN DIRECT INVESTMENT TOTAL

NET

NCL-NCA

€bn


a Short-term xed-income consists of money market instruments and other short-term investment; long-term xed-income consists of medium and long-term

bonds and other long-term investment. In all cases, excluding the Banco de España.

-100

-50

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

LONG -TERM SHORT-TERM TOTAL

NET (NCL - NCA) (a)

€bn

FINANCIAL ACCOUNT: FIXED INCOME BY MATURITY CHART 3.6

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be reduced notably. However, an increase in this deficit due to the foreseeable rise in interest

rates cannot be ruled out, a scenario which is analysed in detail in Box 3.1.

In 2010 the Spanish economy again recorded net outflows of foreign direct investment

(FDI),12 this time for €892 million (0.1% of GDP), against a background of sharp rises in both

Spanish direct investment abroad and foreign direct investment in Spain (see Chart 3.7).

This behaviour of Spanish FDI flows is in line with that observed internationally. The avail-

able information indicates that in 2010 the contraction in world FDI flows halted,13 al-

though their recovery was still weak, with an increase of 0.7% according to preliminary

UNCTAD estimates, after falling sharply in 2009 (by 37%). This increase was concentrated

in the emerging economies (10%), which offset the decline in investment in the developed

economies (-7%). FDI flows also differed depending on the type of transaction. Thus, while

mergers and acquisitions recovered worldwide after falling in the previous two years,

greenfield investment continued to decline, still weighed down by the uncertainty as to the

extent and strength of the economic recovery.

Spanish direct investment abroad transactions amounted to €16,813 million, nearly twice

that of the previous year. Spanish outward FDI represented 1.6% of GDP (0.9 pp more thanin 2009, but well below the average for the period 2000-2010). This, together with the

positive revaluation impact, meant that Spain’s stock of outward FDI amounted to 46.2% of

GDP in 2010, nearly 3.7 pp more than at end-2009. By instrument, FDI transactions were

basically in the form of shares and other direct capital holdings, which offset the net divest-

ments arising from inter-company debt transactions. Two-thirds of Spanish direct invest-

FOREIGN DIRECT INVESTMENT

12 Note that Spanish balance of payments FDI data include transactions by foreign-equity holding companies

(“ETVEs” by their Spanish acronym), which generally give rise to neither capital inflows nor outflows, but chiefly

represent accounting entries. ETVEs have frequently been set up in recent years by non-resident multinational

groups to centralise their FDI holdings in third countries. The heading includes other holding companies which,

although not strictly ETVEs, have been set up in Spain for the main purpose of channelling direct investment.

Excluding ETVEs’ transactions, the behaviour of FDI did not change significantly in 2010 in qualitative terms.13 See “Invest in Spain (2011)”, “Global and Regional FDI Trends in 2010” by the UNCTAD, and “International In-

vestment Limps into 2011”, OECD Investment News, November 2010, No. 14.

ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES

% OF TOTAL

Average 2005-2007 28.8 19.0 39.4 49.1 28.4 29.1 3.4 2.8

2008 33.3 19.3 27.8 43.8 30.4 31.6 8.5 5.2

2009 35.1 19.1 29.8 46.8 29.1 30.6 6.1 3.4

2010 38.3 20.2 25.0 43.4 29.2 32.2 7.4 4.1

VALUE OF STOCK (€bn)

Average 2005-2007 328 358 450 927 324 549 39 53

2008 424 423 354 958 387 692 108 114

2009 448 436 380 1,068 371 697 77 78

2010 490 452 320 971 373 721 95 92

FOREIGN DIRECT

INVESTMENT PORTFOLIO INVESTMENT OTHER INVESTMENT FINANCIAL DERIVATIVES

INTERNATIONAL INVESTMENT POSITION

Breakdown by instrument (a) TABLE 3.6



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BOX 3.1CORRECTION OF THE INCOME DEFICIT AND THE IIP

One of the factors contributing to the decrease in Spain’s net bor-

rowing in 2010 was the appreciably smaller income deficit (down by

0.8 pp of GDP). This fall in the income deficit was due to the in-

creased dividend receipts from foreign direct investment (FDI), which

reached historical highs, and to the interest rates which, on average,

remained low in the year. However, the sovereign debt problems in

Europe and the increased cost of Spain’s access to external financ-

ing, particularly at long term, meant that the improvement in the in-

come balance gradually petered out during the course of 2010.1

FDI and other short-term investment were the investment instru-

ments which most contributed to correcting the income deficit (0.4

pp and 0.2 pp of GDP, respectively). The contribution of other long-

term investment and of equity was less marked, while the balance

on portfolio investment (PI) in fixed income (which accounts for

nearly 80% of the income deficit on portfolio investment) held

steady in terms of GDP, given that the slight narrowing of the deficit

on money market instruments (MMI) was offset by the widening of

that on bonds. The increase in the latter reflected the higher net

interest payments on government debt, which offset the decrease

in those on private-sector debt. These changes in the income bal-

ance by type of investment are generally consistent with the behav-

iour of the net international investment position by instrument.

The increase in the income surplus on FDI was due to the notably

higher dividend income received by Spanish multinationals, up by

0.5 pp of GDP to an all-time high of 2% (see chart below). This rise

took place thanks to the recovery of the world economy, whose cy-

cle leads that of Spain, and to the expansion of external assets,

which reflects the progressively greater international presence of

certain Spanish multinational groups over the last few years. It was

precisely some of the areas with more vigorous FDI which contrib-

uted most to the expansion of dividend income from direct invest-

ment, particularly the euro area, Latin America (especially Brazil) and

Switzerland. Also, the implied return on FDI assets exceeded that of


a Excluding the Banco de España. Including, in the case of IIP net of interest-bearing instruments, net FDI in inter-company debt transactions, net portfolio investment

in xed income and net other investment

b The implied return on a nancial instrument is calculated by dividing the receipts (payments) on each instrument in that period by the value of the external assets

(liabilities) in the form of that nancial instrument in the previous period.c Information available for the period 2003-2010.

0

1

2

3

4

5

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

OTHER INVESTMENT. LONG-TERM LIABILITIES

OTHER INVESTMENT. SHORT-TERM LIABILITIES

3 IMPLIED RETURN ON LIABILITIES: OTHER INVESTMENT (b)

%

0.0

0.5

1.0

1.5

2.0

2.5

2003 2004 2005 2006 2007 2008 2009 2010

DIVIDEND INCOME FROM FDI

10 LARGEST COMPANIES

4 DIVIDEND INCOME FROM FOREIGN DIRECT INVESTMENT (c)

% of GDP

-60

-50

-40

-30

-20

-10

0

-1,200

-1,000

-800

-600

-400

-200

0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

NET IIP

IIP NET OF INTEREST PORTFOLIO INVESTMENT IN FIXED-INCOME LIABILITIES: MONEY MARKET INSTRUMENTS-BEARING INSTRUMENTS

BALANCE ON INVESTMENT INCOME (right-hand scale)

1 NET IIP AND INVESTMENT INCOME (a)

€bn

0

12

3

4

5

6

7

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

PORTFOLIO INVESTMENT IN FIXED-INCOME LIABILITIES: BONDS

%

2 IMPLIED RETURN ON LIABILITIES: PORTFOLIO INVESTMENT IN FIXED INCOME (b)

1 See Banco de España (2011). “Spanish economic projections report”,

Economic Bulletin, April.

8/2/2019 ES - 2010chapter3



BOX 3.1CORRECTION OF THE INCOME DEFICIT AND THE IIP (cont.)

ment abroad was concentrated in “Transport, storage and communication”, while that in

“Financial intermediation” moderated significantly (see Table 3.7). Meanwhile, construction

continued to record net divestment, in line with the adjustment under way in this sector.

Regarding the geographical breakdown of Spanish FDI outflows (excluding foreign-equity

holding companies, or “ETVEs” by their Spanish abbreviation), the significance of the in-

vestments in the United Kingdom (36% of the total) was again noteworthy (see Table 3.8).

The investments in the euro area accounted for 17% of the total, a percentage which is

lower than usual, but which contrasts with the divestments in 2009. The relative weight of

FDI in new EU members was extremely small compared with the percentage reached inthe previous year. Notable outside the EU was the investment in the United States (14%)

and in Latin America (10%). These developments scarcely changed the geographical

breakdown of the stock of FDI external assets, in which the euro area and Latin America

continued to be the leading recipients, although the relative weight of the latter increased

at the expense of the former. The United Kingdom and the United States also retained a

significant share of Spanish direct investment abroad (see Table 3.9).

Foreign direct investment in Spain transactions increased by 142% in 2010 to €15,921 million

(1.5% of GDP, up 0.9 pp on 2009 and also below the average for the period 2000-2010). Con-

sequently, the value of FDI liabilities in the Spanish IIP increased by 1.1 pp of GDP to 42.5%.

The breakdown by instrument shows that shares and other direct holdings accounted for most

of the FDI received by the Spanish economy (some 70% of the total), followed by investment in

the related liabilities. As regards portfolio investment in shares and

other equity, the improvement in the income balance was made pos-

sible by the decrease in payments, particularly dividend payments,

in line with the fall in shareholder remuneration on the Spanish stock

market, which was down by 26% after peaking in 2009. 2

As regards income from interest-bearing instruments, in 2010 the

deficit on other investment was corrected, while that on portfolio in-

vestment in fixed income remained unchanged. These developments

resulted from, first, the higher weight of long-term instruments in the

net debit position in fixed income than in other investment (around

90% and 45%, respectively), since in 2010 long-term interest rates

increased more sharply than short-term rates. However, long-term in-

terest rate movements did not pass through fully to interest payments

on debt, because a significant proportion of non-residents’ holdings of

bonds (such as covered bonds) is tied to short-term rates. Addition-

ally, in the case of debt not tied to a benchmark, the higher interest

rates demanded by the market pass through slowly (as maturing debt

is rolled over) to the interest burden borne by agents.

In any event, the improvement in income from interest-bearing instru-

ments lost steam as the year advanced, in line with the term structure

of interest rates. Thus in the second half, the correction of the deficits

on other investment and on MMI moderated significantly. This feature

was even more marked in bond income, since the related deficit in-

creased in the second half of 2010, reversing the correction achieved

in the first half. The course of the implied return on portfolio investment

liabilities and on other investment liabilities corroborates the cumula-

tive decrease in the last two years, although it has tended to become

steadier recently, particularly in bonds and in other short-term invest-

ment. By contrast, the improvement in the FDI and equity balances

was concentrated in the second half of 2010, due to the rise in Q4 in

FDI dividend income and to additional falls in payments on equities.

The fact that the improvement in the income deficit in 2010 was

based on still-low interest rates which, on balance, showed an up-

ward trend as the year advanced, and on all-time high levels of profit

repatriation by the large Spanish multinationals, advises caution re-

garding the outlook for the balance of investment income vis-à-vis the rest of the world. First, the behaviour of interest rates will affect

net payments in this connection and, second, the future performance

of dividend income is surrounded by high uncertainty, since it is

strongly affected by the decisions of the large Spanish multinationals.

Although the dividends balance remains favourable, it will probably

not grow as vigorously as in 2010, so it cannot be expected to offset

the impact on the income balance of the foreseeable interest rate

rises and of the anticipated net borrowing in the next few years.2 See the 2009 and 2010 market reports of Bolsas y Mercados Españoles

(BME), available on the website http://www.bolsasymercados.es/.

8/2/2019 ES - 2010chapter3



real estate (24%), which grew moderately after falling sharply in the previous two years. Secto-

rally, the most notable feature was the rise in inward FDI in “Electricity, gas and water supply”.

As has become usual in recent years, FDI in “Manufacturing” was also significant.

The EU accounted for most of the FDI in Spain in 2010 (63%), the leading source beingthe euro area (52% of the total), particularly, as in 2009, the Netherlands (44%). The

United Kingdom represented 10%, in contrast to the divestments seen in the previous

year. Most notable beyond the EU was Switzerland, whose investments represented

12% of the total, followed by Latin America and the United States (10% and 9% of the

total, respectively). As is customary, most of the stock of direct investment by non-resi-

dents in Spain comes from the euro area.

In line with developments in direct investment transactions and the impact of valuation effects,

Spain’s net credit position in FDI widened appreciably in 2010 by 2.5 pp of GDP to 3.6%.

Net inflows of funds through portfolio investment amounted to €30,411 million in 2010,

down 33% from 2009 (see Chart 3.8). The capital inflows in this respect resulted from di-

PORTFOLIO INVESTMENT



-70-60-50-40-30-20-10

0102030405060

00 01 02 03 04 05 06 07 08 09 10

SHARES

OTHER EQUITY AND REINVESTED EARNINGS

REAL ESTATEINTER-COMPANY DEBT TRANSACTIONS

TOTAL

NET

NCL-NCA

€bn

-200

-100

0

100

200

300

400

500

600

00 01 02 03 04 05 06 07 08 09 10

NET

ASSETS

LIABILITIES


€bn

-40

-20

0

20

40

60

80

100

120

00 01 02 03 04 05 06 07 08 09 10

INTER-COMPANY DEBT TRANSACTIONS

REAL ESTATE


SHARES

OUTFLOWS

Net change in assets

€bn

-40

-20

0

20

40

60

80

100

120

00 01 02 03 04 05 06 07 08 09 10

INTER-COMPANY DEBT TRANSACTIONS

REAL ESTATE


SHARES

€bn

INFLOWS


FOREIGN DIRECT INVESTMENT (a)

Financial transactions with the rest of the world and International Investment PositionCHART 3.7

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vestments by Spanish financial institutions of foreign securities and from purchases by

non-residents of bonds issued by general government and by large Spanish non-financial

corporations. The latter sold securities issued by resident financial institutions, particularly

asset-backed bonds and securities issued by MFI subsidiaries. These transactions re-

sulted in net purchases of bonds for €47,437 million. By contrast, transactions in money

market instruments gave rise to net outflows of capital for €5,060 million, compared with

the substantial funds raised in 2009. Larger net outflows were generated by transactions

in equities (€11,967 million), driven by Spanish investment in foreign shares.

Spanish portfolio investment abroad transactions generated net inflows of €63,461 million (6%

of GDP). Residents increased their foreign equity holdings (€8,720 million), in line with the im-proved economic outlook abroad, but reduced their stock of fixed income holdings (by €72,181

million), basically bonds (€65,759 million). Most of the sales of debt were by the private sector

(€66,225 million, of which bonds represented 90%), although the change in the composition of

the Social Security Reserve Fund’s portfolio towards securities issued by Spanish general gov-

ernment also led to a decrease in its holdings of bonds issued by non-residents (€5,956 million).

External assets in the form of portfolio investment securities decreased by 5.9 pp of GDP

to 30.2% in 2010, owing to the decrease both in the fixed-income position (by 7.3 pp of

GDP to 21% of GDP), which offset the increase in external assets in the form of equity

holdings (by 1.4 pp of GDP to 9.1%) The geographical breakdown of the stock of portfo-

lio investment abroad saw no significant changes, with investments in the EU accounting

for a high share (see Table 3.10).

2009 2010 2009 2010

Total 7,009 16,813 6,576 15,921

Agriculture, hunting, forestry and shing 325 . 347 -89

Mining and quarrying 895 633 510 -290

Manufacturing -2,321 1,557 3,990 4,745

Electricity, gas and water supply -4,996 -3,200 1,991 3,997

Construction 1,361 -446 -274 -252

Wholesale and retail trade and repairs 2,489 1,068 -8,103 -4,745

Hotels and restaurants 245 141 330 .

Transport, storage and communication -753 10,916 1,066 2,120

Financial intermediation 6,854 1,368 -431 1,378

Real estate and business activities 1,472 2,883 967 4,689

Of which: ETVEs (b) -965 703 -782 2,294

Other services (c) 606 258 555 186

Unclassied 830 1,640 5,628 4,155

Real estate 956 738 3,651 3,757

Other -126 902 1,978 398

SPANISH DIRECT

INVESTMENT ABROAD

FOREIGN DIRECT

INVESTMENT IN SPAIN

FOREIGN DIRECT INVESTMENT TRANSACTIONS IN 2009 AND 2010 (a)

Breakdown by economic sector TABLE 3.7

€m


a «.» Amount below €50 million in absolute terms.

b Estimate based on CNAE classication. Includes transactions of ETVEs and other holding companies that are not strictly ETVEs but which, like them, have been

established in Spain for the main purpose of channelling direct investment ows.

c "Other services" include "General government, defence and compulsory Social Security", "Education", "Health and veterinary activities and social services", "Other

community service and social activities and personal services", "Private households employing domestic staff" and "Extra-territorial organisations".

8/2/2019 ES - 2010chapter3



Turning to foreign portfolio investment in Spain, non-residents also made divestments (al-beit smaller than those made abroad by residents), which amounted to €33,049 million,

equal to 3% of GDP. These divestments affected all portfolio instruments, particularly fixed

income holdings (€29,803 million) and, within these, particularly bonds (€18,321 million). The

outcome was that non-residents increased their holdings of long-term government debt

(€15,561 million) and reduced to a greater extent their holdings of this type of securities is-

sued by the private sector (by €33,882 million). Specifically, non-residents sold bonds issued

by IMFs for €14,677 million (€1,699 million of covered bonds), in contrast to the investments

made in the previous year. Also, they reduced their holdings of long-term fixed-income se-

curities issued by ORSs for the third year running, this time by €19,206 million. This decrease

occurred despite the higher purchases of bonds issued by large non-financial corporations

(which were up by €7,659 million), which did not offset the volume of divestments of asset-

backed bonds (€20,448 million) and of securities issued by subsidiaries of resident financial

TOTAL ETVEs (d) TOTAL ETVEs (d) TOTAL ETVEs (d) TOTAL ETVEs (d)

WORLD TOTAL 7,009 -965 16,813 703 6,576 -782 15,921 2,294

EUROPEAN UNION 27 (b) -1,322 139 8,896 214 3,462 1,207 10,300 1,733

Euro area -5,111 . 2,871 130 7,008 797 8,691 1,605

Germany 1,403 . 969 . -3,701 . 3,074 1,319

France -1,682 118 471 . -2,207 . -6,959 .

Netherlands -918 -488 -5,011 . 6,920 -53 5,916 .

Italy -5,515 . 436 . -2,527 . -7,722 .

Luxembourg -251 436 737 . 11,166 773 9,877 232

Portugal 911 . -58 . -508 . -416 .

United Kingdom 2,896 98 5,762 . -1,798 445 1,409 .

New EU members (c) 1,069 . 239 95 153 . 208 53

Switzerland 187 -487 424 . 627 -418 1,654 64

United States 1,013 -1,227 2,354 83 -2,481 -1,392 1,368 161

LATIN AMERICA 5,286 530 2,002 455 186 -63 1,711 293

Argentina 1,043 195 -166 . -395 . 54 .

Brazil 1,389 269 -775 227 . . 699 267

Chile -192 . -216 . . . . .

Mexico 4,484 -133 1,940 119 459 . 757 .

Morocco -104 . -644 . . . . .

Japan -156 . . . . . . .

Australia -243 . 106 . . - -50 -

MEMORANDUM ITEM: OECD 4,598 -1,695 14,380 409 2,566 -638 14,392 2,027

2009 2010 2009 2010

SPANISH DIRECT INVESTMENT ABROAD FOREIGN DIRECT INVESTMENT IN SPAIN

FOREIGN DIRECT INVESTMENT TRANSACTIONS IN 2009 AND 2010 (a)

Breakdown by geographical areaTABLE 3.8

€m


a “.” Amount below €50 million in absolute terms.

b European Union: International Institutions of the European Union, ECB, France, Belgium, Netherlands, Germany, Italy, United Kingdom, Ireland, Denmark, Greece,

Portugal, Luxembourg, Austria, Finland, Sweden, Cyprus, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Malta, Poland, Slovenia, Slovakia, Romania and

Bulgaria and their dependencies.

c New member countries: Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Bulgaria and Romania.

d Estimate based on CNAE classication. Includes transactions of ETVEs and other holding companies that are not strictly ETVEs but which, like them, have been

established in Spain for the main purpose of channelling direct investment ows.

8/2/2019 ES - 2010chapter3



institutions (€7,670 million). Finally, non-residents made net sales of Spanish equities for

€1,467 million, a significantly lower amount that in the previous two years.

External portfolio investment liabilities fell more steeply than assets, by an amount equalto 9.9 pp of GDP. This decrease was also seen in equities, where, moreover, it was sharp-

er due to the aforementioned valuation effects, and in fixed income (the falls were by 6 pp

and 3.9 pp of GDP to 17.2% and 74.1% of GDP, respectively). The geographical break-

down of portfolio investment liabilities given in the IMF’s latest Coordinated Portfolio In-

vestment Survey (CPIS),14 with data relating to end-2009, reflects the predominance of

investment from the euro area, although the shares of the United Kingdom and the United

States are also significant (see Table 3.11).

€bn % OF TOTAL €bn % OF TOTAL €bn % OF TOTAL €bn % OF TOTAL

WORLD TOTAL 448 100.0 490 100.0 436 100.0 452 100.0

EUROPEAN UNION 27 (b) 259 57.8 274 55.9 351 80.6 362 80.1

Euro area 159 35.6 168 34.3 300 68.8 311 68.8

Germany 14 3.1 15 3.1 25 5.6 28 6.2

France 18 4.1 20 4.0 40 9.3 32 7.2

Netherlands 44 9.8 43 8.8 102 23.5 109 24.0

Luxembourg 30 6.6 31 6.3 59 13.5 71 15.7

Portugal 24 5.4 24 5.0 10 2.3 9 2.1

United Kingdom 66 14.7 73 14.8 45 10.2 44 9.8

New EU members (c) 30 6.7 30 6.0 1 0.2 1 0.2

Switzerland 12 2.7 14 2.8 13 2.9 14 3.1

United States 35 7.8 39 8.0 42 9.6 43 9.5

LATIN AMERICA 121 27.0 137 28.0 10 2.4 12 2.7

Argentina 26 5.9 31 6.3 . . . .

Brazil 41 9.1 44 8.9 3 0.8 4 0.9

Chile 12 2.7 13 2.7 0 0.1 0 0.1

Mexico 25 5.6 30 6.1 1 0.3 2 0.5

Morocco 2 0.4 1 0.2 . . . .

Japan 0 0.1 1 0.1 1 0.3 2 0.3

Australia 3 0.6 4 0.7 . . . .

MEMORANDUM ITEM: OECD 337 75.3 378 77.1 415 95.1 430 95.2

2009 2010 2009 2010

SPANISH FOREIGN DIRECT INVESTMENT FOREIGN DIRECT INVESTMENT IN SPAIN

FOREIGN DIRECT INVESTMENT IIP IN 2009 AND 2010 (a)

Breakdown by geographical area and selected economiesTABLE 3.9


a “.” Amount below €0.3 billion.

b EU27: International Institutions of the European Union, ECB, France, Belgium, Netherlands, Germany, Italy, United Kingdom, Ireland, Denmark, Greece, Portugal,

Luxembourg, Austria, Finland, Sweden, Cyprus, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Malta, Poland, Slovenia, Slovakia, Bulgaria and Romania and

their dependencies.

c New EU members: Bulgaria, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland and Romania.

14 The IIP does not give an adequate geographical breakdown of portfolio liabilities, as it provides information only

on the first known non-resident counterparty, which in many cases is not the ultimate holder of the securities,

the latter being the relevant party for the purposes of economic analysis. The analysis under the end-investorcriterion is based on the geographical breakdown of the portfolio assets of other countries vis-à-vis Spain

contained in the CPIS. For the CPIS data, see the IMF website: http://www.imf.org/external/np/sta/pi/cpis.htm.

8/2/2019 ES - 2010chapter3



Although the year as a whole saw net inflows in portfolio investment, the net debit position

in this component of the financial account of the balance of payments decreased by 4.1

pp of GDP to 61.2%, due to the impact of the valuation effect, related mainly to the fall in

stock market prices in Spain as opposed to the gains in other parts of the world. Thedebit balance on equities decreased by 5.3 pp of GDP to 8.1%, while the net debit position

in fixed income widened (by 1.2 pp to 53.1% of GDP).

Other investment transactions (basically loans, deposits and repos) resulted in net out-

flows of €9,117 million in 2010 (see Chart 3.9). By maturity, the net capital outflows related

to both short-term instruments (€6,170 million) and long-term instruments (€2,947 million).

As has become customary, the behaviour of this item is influenced by MFI transactions,

which generated net outflows of €14,720 million, offsetting the inflows of funds recorded

by ORSs and general government (€4,080 million and €1,523 million, respectively). Fund-

raising by Spanish credit institutions became considerably complicated at some points

during the year, notably between May and June, coinciding with the most critical stage of

the Greek debt crisis, when the recourse by MFIs to Eurosystem liquidity increased. Sub-

OTHER INVESTMENT (LOANS,

DEPOSITS AND REPOS)



-50

0

50

100

150

200

250

00 01 02 03 04 05 06 07 08 09 10

MONEY MARKET INSTRUMENTS

SHARES AND MUTUAL FUNDS

TOTAL

NET

NCL-NCA €bn

-800

-600

-400

-200

0

200

400

600

800

1,000

1,200

00 01 02 03 04 05 06 07 08 09 10

ASSETS

LIABILITIES

NET


€bn

-100

-50

0

50

100

150

200

250

00 01 02 03 04 05 06 07 08 09 10


BONDS AND NOTES


OUTFLOWS


€bn

-100

-50

0

50

100

150

200

250

00 01 02 03 04 05 06 07 08 09 10


BONDS AND NOTES


€bn

INFLOWS


PORTFOLIO INVESTMENT (a)


BONDS AND NOTES

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EQUITY SECURITIES DEBT SECURITIES TOTAL SHARE OF TOTAL (%)

France 13.6 38.4 52.0 13.7

Germany 6.2 28.7 34.8 9.1

Italy 2.5 46.6 49.1 12.9

United Kingdom 3.6 31.6 35.3 9.3

Netherlands 2.4 38.0 40.4 10.6

Luxembourg 27.3 5.4 32.7 8.6

United States 7.1 28.1 35.2 9.2

Cayman Islands 0.7 11.5 12.2 3.2

Ireland 3.4 18.1 21.5 5.6

Belgium 0.4 5.9 6.3 1.6

Portugal 2.2 9.5 11.7 3.1

Other 8.6 26.0 34.6 9.1

TOTAL ASSETS 81.6 299.4 381.1 100.0

IIP: FOREIGN PORTFOLIO INVESTMENT BY SPAIN

Breakdown by geographical area and by instrument. 2009 (a) TABLE 3.10

€bn



FKC EI FKC EI FKC EI FKC EI

France 24.9 22.8 79.0 174.9 103.9 197.7 9.7 23.4

Germany 6.9 12.8 60.7 147.1 67.6 159.9 6.3 18.9

Luxembourg 18.4 14.1 187.8 53.6 206.1 67.6 19.3 8.0

United Kingdom 70.3 15.6 19.7 47.1 90.0 62.7 8.4 7.4

United States 65.6 60.7 20.9 18.1 86.5 78.8 8.1 9.3

Netherlands 5.6 6.8 18.0 42.5 23.6 49.3 2.2 5.8

Ireland 1.4 7.6 6.9 43.4 8.3 51.0 0.8 6.0

Japan . 6.2 0.4 20.4 0.7 26.5 0.1 3.1

Belgium 13.5 3.1 260.3 33.2 273.9 36.3 25.6 4.3

Italy 2.2 4.4 6.3 24.2 8.5 28.7 0.8 3.4

Unassigned -0.9 . 173.4 . 172.5 . 16.2 0.0

Other 14.3 27.3 184.6 60.6 198.7 87.9 18.6 10.4

TOTAL LIABILITIES 223.2 181.4 844.6 665.0 1,067.8 846.4 100.0 100.0

EQUITY SECURITIES SHARE OF TOTAL (%)DEBT SECURITIES TOTAL

IIP: FOREIGN PORTFOLIO INVESTMENT IN SPAIN (a) Breakdown by geographical area and by instrument, and comparison with CPIS data (b). 2009

TABLE 3.11

€bn

SOURCE: Banco de España and IMF.

a “.” Amount below €0.3 billion.

b FKC: geographical assignment of liabilities under the rst-known counterparty principle. EI: geographical assignment by end-investor principle, based on the stock

of assets of the creditor countries.

8/2/2019 ES - 2010chapter3



sequently, the improvement in the perception of sovereign risk and in the solvency of the

Spanish financial system (linked to the measures adopted by the Spanish authorities), to-

gether with the access of some Spanish institutions to international central counterparty

clearing houses, made it easier for resident institutions to obtain funding abroad.

Other Spanish investment abroad increased appreciably in 2010 to €14,484 million. Net

investment in long-term instruments (€16,800 million) exceeded divestments of short-termassets (amounting to €2,316 million). MFIs’ transactions accounted for the bulk of the net

transactions under this balance of payment heading.

Meanwhile, other foreign investment in Spain gave rise to inflows of €5,367 million in 2010.

As on the asset-side, the investments in the form of long-term instruments (€13,853 mil-

lion) offset the divestments of short-term instruments (€8,486 million). Funds were raised

through long-term instruments by all institutional sectors, mainly ORSs (€6,811 million),

followed by general government (€4,468 million). Short-term outflows resulted from the

cancellation of deposits and repos with resident MFIs (€10,809 million).

Although there were net outflows of this type of financial assets in the year as a whole, the

debit position in other investment continued to increase in 2010, albeit less sharply than in



-60

-40

-20

0

20

40

60

80

100

00 01 02 03 04 05 06 07 08 09 10

SHORT-TERM NET, OTHER RESIDENT SECTORS

LONG-TERM NET, OTHER RESIDENT SECTORS

SHORT-TERM NET, MFIs

LONG-TERM NET, MFIs

NET

NCL-NCA

€bn

-600

-400

-200

0

200

400

600

800

00 01 02 03 04 05 06 07 08 09 10

NET ASSETS LIABILITIES


€bn

-40

-20

0

20

40

60

80

100

00 01 02 03 04 05 06 07 08 09 10

SHORT-TERM ASSETS OF MFIsLONG-TERM ASSETS OF MFIs

ASSETS OF OTHER RESIDENT SECTORS

OUTFLOWS


€bn

-40

-20

0

20

40

60

80

100

00 01 02 03 04 05 06 07 08 09 10

SHORT-TERM LIABILITIES OF MFIs

LONG-TERM LIABILITIES OF MFIs

SHORT-TERM LOANS TO OTHER RESIDENT SECTORS

LONG-TERM LOANS TO OTHER RESIDENT SECTORS

€bn

INFLOWS


OTHER INVESTMENT (a)


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the previous year, to stand at 32.7% of GDP, due to the increase in the value of liabilities

(which amounted to 67.8% of GDP), since external assets decreased slightly as a percent-

age of GDP (to 35.1%, despite having increased in level). In 2010 there were no particu-

larly significant changes in the breakdown by geographical area of other Spanish invest-

ment, which is highly concentrated in the EU, particularly in the euro area and in the UK,

reflecting the latter’s role as an international financial centre.

Transactions in derivative financial instruments gave rise to a net inflow, the first since

2006, amounting to €7,317 million. Despite this, the position of the Spanish economy in

instruments of this type swung to a credit balance of 0.3% of GDP from a debit position of

0.1% of GDP at end-2009. As usual, the transactions in derivative financial instruments

were basically carried out by MFIs in over-the-counter markets. It is important to keep in

mind that these transactions are not due to the need to cover a financing gap in the

economy, but rather to agents’ strategic and hedging decisions, which explains why these

transactions are generally highly volatile and why they grow in times of uncertainty.

As in 2009, all institutional sectors raised funds abroad, except for ORSs15 (see Chart

3.10). The volume of funds raised by general government (€22,214 million, 2.1% of GDP)

was larger than by MFIs (€15,650 million, 1.5% of GDP). Conversely, ORSs’ financial trans-

actions generated net capital outflows of €10,145 million (1% of GDP).

As regards the general government sector, non-residents continued to increase their holdings

of government debt, specifically in long-term bonds, although these inflows were much

smaller than in 2009. The external financing received by general government through other

investment was lesser in amount, although it was also concentrated in long-term instruments.

Net funds raised abroad by MFIs were mainly in the form of direct investment and medi-

um- and long-term bonds. In the latter, the sales by Spanish institutions of these securities

DERIVATIVE FINANCIAL

INSTRUMENTS

3.3 Breakdown by

institutional sector

-15

-10

-5

0

5

10

15

00 01 02 03 04 05 06 07 08 09 10

MONETARY FINANCIAL INSTITUTIONS MONETARY AUTHORITY

GENERAL GOVERNMENT OTHER RESIDENT SECTORS

TOTAL

FINANCIAL TRANSACTIONS BY SECTOR (NCL-NCA)

% of GDP

-100

-80

-60

-40

-20

0

20

00 01 02 03 04 05 06 07 08 09 10

TOTAL MONETARY FINANCIAL INSTITUTIONS

MONETARY AUTHORITY GENERAL GOVERNMENT

OTHER RESIDENT SECTORS

% of GDP

NET IIP BY SECTOR

2000-2010

FINANCIAL TRANSACTIONS WITH THE REST OF THE WORLD AND

INTERNATIONAL INVESTMENT POSITION, BY SECTORCHART 3.10


15 It should be noted here that ORSs include not only households and non-financial corporations, but also non-monetary financial institutions (e.g. securitisation SPEs and the subsidiaries of MFIs specialising in the issu-

ance of securities).

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TOTAL ORS

NON-

MONETARY

FINANCIAL

INSTITUTIONS

NON-

FINANCIAL

CORPORATIONS

AND

HOUSEHOLDS

AND NPISHs

TOTAL ORS

NON-

MONETARY

FINANCIAL

INSTITUTIONS

NON-FINANCIAL

CORPORATIONS

AND

HOUSEHOLDS AND NPISHs

NCA TOTAL 8,145 -2,170 10,315 4,670 -28,874 33,544

FOREIGN DIRECT

INVESTMENT 1,453 44 1,410 24,085 1,448 22,637

SHARES AND MUTUAL

FUNDS9,548 3,553 5,995 10,695 5,247 5,448

BONDS AND NOTES 3,079 1,109 1,970 -31,767 -32,070 303

MONEY MARKET

INSTRUMENTS-5,119 -4,829 -290 -2,948 -3,110 162

OTHER INVESTMENT -816 -2,047 1,230 4,605 -389 4,994

NCL TOTAL -18,237 -35,046 16,810 -4,052 -36,391 32,339

FOREIGN DIRECT

INVESTMENT 5,364 215 5,149 13,888 -1,496 15,383

SHARES AND MUTUAL

FUNDS-2,687 20 -2,708 -1,467 -1,056 -411

BONDS AND NOTES -25,790 -39,421 13,632 -19,206 -28,124 8,918

MONEY MARKET

INSTRUMENTS4,942 4,907 35 -5,952 -6,288 336

OTHER INVESTMENT -65 -767 702 8,685 573 8,113

2009 2010

PORTFOLIO

INVESTMENT

PORTFOLIO

INVESTMENT

BREAKDOWN BY INSTRUMENT OF THE "OTHER RESIDENT SECTORS" (ORSs) SECTOR TABLE 3.12

€bn


NET ASSETS LIABILITIES NET ASSETS LIABILITIES NET ASSETS LIABILITIES NET ASSETS LIABILITIES

VALUE OF STOCK (€bn)

Average

2005-200782.1 83.4 1.3 -367.6 397.2 764.8 -182.4 26.9 209.3 -191.0 704.0 894.9

2008 50.9 86.1 35.2 -412.6 532.9 945.5 -193.4 40.6 234.0 -308.0 699.4 1,007.4

2009 44.1 85.6 41.5 -468.6 501.4 970.0 -268.8 29.7 298.5 -266.9 744.3 1,011.2

2010 30.3 81.7 51.4 -462.1 470.3 932.4 -272.5 28.2 300.7 -221.4 781.0 1,002.4

PERCENTAGE OF GDP (%)

Average

2005-20079.0 9.2 0.1 -40.4 43.7 84.2 -20.1 3.0 23.0 -21.0 77.5 98.5

2008 4.7 7.9 3.2 -37.9 49.0 86.9 -17.8 3.7 21.5 -28.3 64.3 92.6

2009 4.2 8.1 3.9 -44.5 47.6 92.0 -25.5 2.8 28.3 -25.3 70.6 95.9

2010 2.9 7.7 4.8 -43.5 44.3 87.7 -25.6 2.7 28.3 -20.8 73.5 94.3

MONETARY AUTHORITY MFIs GENERAL GOVERNMENT ORS


Breakdown by sector TABLE 3.13


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BANCO DE ESPAÑA 61 THE SPANISH BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION 20 0

issued by non-residents amply exceeded the divestments by non-residents of securities

issued by Spanish MFIs, including covered bonds. By contrast, other investment gave rise

to net outflows, since to MFIs’ investments abroad in long-term instruments was added

the cancellation of deposits and repos with resident MFIs.

ORSs’ financial transactions with the rest of the world generated net outflows, mainly in

the form of direct investment and equities, as a result of investments abroad in instrumentsof this type. These outflows offset the net inflows in the form of long-term loans and of

bonds, because here, as in the case of MFIs, the net sales by ORSs of long-term debt is-

sued by non-residents exceeded the divestments by ORSs of medium and long-term

bonds issued by residents (see Table 3.12).

As regards the contribution of the institutional sectors to the change in the net debit IIP, the

decrease in 2010 resulted from the decline in the debit balance of ORSs (by 4.5 pp of GDP

to 20.8%), as a reflection of the improvement in the balances on portfolio investment in

equity and on direct investment (2.4 pp and 3.3 pp of GDP, respectively), which offset the

worsening of the positions in other instruments. The debit balance of MFIs with the rest of

the world also decreased (by 1 pp of GDP to 43.5%). The net debit IIP of general govern-

ment widened slightly by 0.1 pp of GDP to 25.6%, due to the larger debit balances on

other investment and on portfolio investment (see Table 3.13).

Lastly, in 2010 the net assets of the Banco de España fell for the fourth year running, this

time by €15,696 million, due to the financial transactions in the period made under the

influence of the aforementioned financial turmoil. The net assets vis-à-vis the Eurosystem

fell by €9,788 million while the Banco de España’s other net assets dropped by €6,722

million.16 By contrast, reserves increased by €814 million. Consequently, the Banco de

España’s net credit position stood at 2.9% of GDP, down 1.3 pp from 2009.

16 Investments in securities not forming part of reserves. For a description of these assets, see Chapter 4 of this

report.

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