Euro area international investment position and its geographical breakdown (as at end-2008)

The international investment position of the euro area vis-à-vis the rest of the world recorded net liabilities of EUR 1.6 trillion (representing 18% of euro area GDP) at the end of 2008. Compared with the end of 2007, the net liability position increased by EUR 0.4 trillion. This higher net liability position was mainly the result of net financial transactions (EUR 164 billion), revaluation effects due to exchange rate changes (EUR 108 billion) and other adjustments (due to new data for one euro area country) (EUR 204 billion).

At the end of 2008, 23% of the euro area stock of direct investment abroad was in the United Kingdom and 20% in the United States, while almost two-thirds of the stock of foreign direct investment in the euro area originated from these two countries. The portfolio investment assets of euro area residents mainly reflected holdings of securities issued in the United States (33%) and in the United Kingdom (24%).

With this release of statistics, the ECB is introducing an improved compilation method for euro area balance of payments and international investment position statistics (see the “Data revisions” section below).

At the end of 2008, the international investment position (i.i.p.) of the euro area vis-à-vis the rest of the world recorded net liabilities of EUR 1.6 trillion (representing 18% of euro area GDP). This reflects an increase of EUR 0.4 trillion in net liabilities compared with the revised end-2007 position, which represented 14% of euro area GDP (see Chart 1a).

The increase in the net liability position from end-2007 to end-2008 was mainly the result of net financial transactions (EUR 164 billion), revaluation effects due to exchange rate changes (EUR 108 billion) and other adjustments (EUR 204 billion), which were to a limited extent offset by revaluation effects due to price changes (EUR 88 billion) (see Chart 1b). The other adjustments mainly reflected the introduction of a new data collection system for portfolio investment in one euro area country. Compared with 2007, exchange rate changes in 2008 had a lesser impact on the euro area’s net liability position, while net financial transactions and other adjustments had a much greater impact.

The net financial transactions were mainly driven by a net increase in portfolio investment liabilities (by EUR 342 billion) accounted for by net purchases of euro area debt securities (EUR 466 billion) by non-residents, which were partly offset by net sales of euro area equity securities (EUR 125 billion) by non-residents.

The changes in outstanding amounts related to exchange rate variations broadly reflecting the appreciation of the euro in 2008. As the euro area’s external assets are mostly denominated in foreign currencies and its external liabilities in euro, an appreciation of the euro results in a lower euro value of external assets and thus in an increase of the net liability position of the euro area. In 2008 changes in the i.i.p. related to exchange rate variations were mainly due to foreign currency revaluations of other investment (EUR 52 billion), portfolio investment (EUR 49 billion) and, to a lesser extent, direct investment (EUR 17 billion).

The i.i.p. revaluations reflecting price changes amounted to EUR 88 billion in net terms in 2008. These were mainly recorded in portfolio investment (EUR 160 billion), reflecting higher price decreases of euro area equity securities (EUR 1.0 trillion) held by non-residents than of foreign equity securities (EUR 717 billion) and foreign bonds and notes (EUR 86 billion) held by euro area residents. These exceptionally large price decreases of both assets and liabilities are related to the financial crisis.

At the end of 2008, the stock of euro area direct investment abroad amounted to EUR 3.7 trillion, 23% of which was invested in the United Kingdom, 20% in the United States, 11% in offshore financial centres, 10% in Switzerland and 7% in other EU countries. The stock of foreign direct investment in the euro area amounted to EUR 3.2 trillion, 36% of which originated from the United Kingdom, 25% from the United States, 13% from offshore financial centres and 8% from Switzerland. The United Kingdom was the most important net investor in the euro area (EUR 294 billion).

With regard to portfolio investment, euro area holdings of foreign securities amounted to EUR 3.8 trillion at the end of 2008, which largely reflected holdings of securities issued in the United States (33% of the total), the United Kingdom (24%) and offshore financial centres (12%). Foreign holdings of euro area securities amounted to EUR 6.1 trillion at the end of 2008.

Turning to other investment, the outstanding amount of euro area holdings abroad (e.g. loans by euro area MFIs to non-residents or deposits by euro area residents with non-euro area MFIs) was EUR 5.5 trillion at the end of 2008, 37% of which was in the United Kingdom, 16% in the United States and 12% in offshore financial centres. The other investment in the euro area (e.g. non-residents’ deposits with euro area MFIs or loans to euro area residents by non-euro area MFIs) amounted to EUR 5.7 trillion at the end of 2008, of which the United Kingdom accounted for 38%, the United States for 20% and offshore financial centres for 11%.

In addition to regular revisions for 2006, 2007 and 2008, this press release incorporates a revised set of balance of payments (b.o.p.) and i.i.p. statistics for 2004 and 2005.

Most of these revisions stem from an improvement to the compilation method at the euro area level in the b.o.p. and i.i.p. related to other sectors (namely households and non-MFI corporations). The new euro area compilation method, which was announced in the press releases on 16 and 22 October 2009, results in a higher asset position in loans and deposits abroad, and in a lower liability position in equity securities. Importantly, the new results entail diminished statistical discrepancies (i.e. errors and omissions) within the euro area b.o.p. from 2004 onwards. The data from January 2009 to August 2009 have also been revised according to the new method; those results are available on the ECB’s website. The new method is described in more detail in a dedicated methodological note.

Other revisions in 2004 and 2005 were due to the implementation of a new data collection method in one euro area country.

The revisions of the current account in 2008 also concerned income on direct investment and resulted in an increase of the current account deficit by EUR 42.3 billion (to EUR 143.3 billion). Detailed results from companies’ balance sheets, which become available with some delay, showed that reinvested earnings were lower than initially estimated for investment abroad and higher for investment in the euro area.

The revisions of the capital account balance in 2007 resulted in a reduction of the surplus by EUR 8.7 billion (to EUR 5.0 billion).

Finally, the euro area net liability position at end-2008 (now EUR 1.6 trillion) was EUR 167 billion lower than the previously published results for the fourth quarter of 2008.

This press release contains a breakdown of the change in the annual i.i.p. into revaluations resulting from price variations, exchange rate changes, and other adjustments (e.g. reclassifications between items, write-downs, changes in survey coverage). This breakdown is obtained by modelling the i.i.p. changes other than transactions with information from the geographical breakdown and currency composition of assets and liabilities, as well as price indices for different financial assets.

Additionally, this press release contains a breakdown of direct investment equity into investment in listed companies, unlisted companies and real estate. While direct investment in listed companies is valued at market prices observed on stock exchanges, investment in unlisted companies is valued based on the books of the companies being financed. For analytical purposes, the valuation of listed companies at book value is also provided as a memorandum item, although it is not considered in the calculation of total direct investment.

Geographical details of the annual i.i.p. of the euro area are not available for the items portfolio investment liabilities, financial derivatives and reserve assets

A complete set of updated euro area b.o.p. and i.i.p. statistics is available on the ECB’s website in the “Statistics” section under the headings “Data services”/“Latest monetary, financial markets and balance of payments statistics”. These data, as well as the historical euro area b.o.p. and i.i.p. time series, can be downloaded from the ECB’s Statistical Data Warehouse (SDW). They will also be published in the November 2009 issues of the ECB’s Monthly Bulletin and Statistics Pocket Book. A detailed methodological note is available on the ECB’s website. The next quarterly press release on the euro area b.o.p. (including geographical details) and i.i.p. will be published on 20 January 2010.

Annexes

Table 1 – International investment position of the euro area, including breakdown of changes from end-2007 to end-2008

Table 2a – Geographical breakdown of the euro area international investment position (end-2008)

Table 2b – Geographical breakdown of the euro area international investment position (end-2007)

Table 3 – Revisions of the euro area balance of payments and international investment position (difference vis-à-vis previously published data)