Twenty-Third Meeting of the IMF Committee on Balance of Payments Statistics Washington, D.C. October 25-27, 2010

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1 BOPCOM-10/15 Twenty-Third Meeting of the IMF Committee on Balance of Payments Statistics Washington, D.C. October 25-27, 2010 Bilateral Cross-Border Holdings and Global Imbalances A View on the Eve of the Global Financial Crisis Prepared by the Research Department International Monetary Fund

3 BILATERAL CROSS-BORDER HOLDINGS AND GLOBAL IMBALANCES: A VIEW ON THE EVE OF THE GLOBAL FINANCIAL CRISIS Gian Maria Milesi-Ferretti, Francesco Strobbe, and Natalia Tamirisa International Monetary Fund, Research Department This paper should not be reported as representing the views of the IMF. The views expressed are those of the author(s) and do not necessarily represent those of the IMF or IMF policy.

4 Introduction Two phenomena over the last decade Emergence of global imbalances Financial integration (growth of cross-border flows) Worries about global imbalances but initial iti transmission i of the crisis i through h gross exposures Bilateral perspective key in understanding crisis transmission Relation between the two phenomena?

5 What we do in this paper p Construct a dataset of bilateral external assets and liabilities for all the major players for 2007 US, euro area, Japan, China Financial centers: UK, Switzerland, Hong Kong, Singapore, offshore centers Surplus regions: emerging Asia, oil exporters Large emerging markets: Brazil, Russia, India Other advanced economies: Canada, Australia, New Zealand, Denmark, Norway, Sweden Emerging markets in Europe

6 Research Questions Is there a relation between the geographical g pattern of global imbalances and that of financial integration? Are major financial partners each other s main creditors and debtors, and in what financial instruments? How do size and composition of countries gross and net external positions affect the transmission of macroeconomic and financial shocks?

7 Data strengths and weaknesses Strengths: Network of cross-border financial linkages from a geographical g (residence) perspectivep Consistent with balance of payments data Weaknesses: No information on currency of denomination Does not necessarily measure ultimate exposures

8 Related work Kubelec and Sa (2009, 2010) Bilateral positions for 18 countries, Relies on estimation to fill gaps Daude and Fratzscher (2007) Gravity-type type equations for bilateral FDI, portfolio, and banking positions BIS research (Patrick McGuire et al) Many studies on bilateral positions for specific asset categories (portfolio, banking etc)

9 The Bilateral IIP Data Summary of the financial relationship between a country s residents and the ROW at year-end Instruments FDI (book or market value) Portfolio (equity and debt) Other investment Reserves Limited reporting of data on financial derivatives Main Data Sources IMF s Coordinated Portfolio Investment Survey (CPIS) BIS locational banking statistics Eurostat, OECD, UNCTAD for FDI National sources (example: US portfolio liabilities, UK IIP, euro area IIP etc) Data reported or derived from partner country sources (very limited reliance on estimated data for FX reserves)

10 What do we know from aggregate data? I. Net external positions US Jpn Chn EMA oil Eur surplus Eur deficit ROW

11 What do we know from aggregate data? II. Gross external assets 5% 4% 4% 3% 2% Euro Area United States 23% United Kingdom Other advanced 6% Offshore Japan 9% Emg Asia incl China 10% 20% HK + SGP ROW Oil exporters 14% BRI

12 Data coverage (in pct of total reported assets and liabilities) Assets Liabilities Bilateral data coverage (in percent of total identified assets and liabilities)

13 Gaps in data coverage (billions of USD) Assets Liabilities "Gaps" in bilateral data coverage (billions of US dollars)

14 Missing portfolio claims on the euro area Oil exporters? Offshore centers? Reserve holders? Under-reported euro area claims? Table. Liabilities without an identified partner (USD bill) Portfolio equity Portfolio debt Total euro area 2, Total euro area 1,357 Luxembourg 1,100 France 415 Ireland 733 Netherlands 260 Netherlands 271 Italy 248 Spain 106 Germany 167

15 The United States: net position CHINA JAPAN OFFSHORE OIL EXPORTING EURO AREA UK Net foreign assets (in percent of GDP) SINGAPORE EMERGING ASIA HONG KONG SWITZERLAND OTHER ADVANCED BRI CANADA

16 The United States: gross position HONG KONG SINGAPORE BRI OIL EXPORTING EMERGING ASIA Liabilities Assets SWITZERLAND OTHER ADVANCED CANADA Foreign assets and liabilities (in percent of GDP) CHINA JAPAN UK OFFSHORE EURO AREA

17 United States: composition of net position China Japan Offshore centers Oil exporters Euro Area United Kingdom Singapore Emerging Asia Hong Kong Switzerland Other Lat. Am. Other advanced BRI Canada Net foreign assets (in percent of GDP) FDI Port equity Other inv Portfolio debt

18 Euro Area: net position OTHER EUROPE OFFSHORE USA UNITED KINGDOM BRI EMERGING ASIA Net foreign assets (in percent of GDP) OTHER ADVANCED SINGAPORE CHINA CANADA HONG KONG OIL EXPORTING SWITZERLAND JAPAN

19 Euro area: gross positions CHINA SINGAPORE OIL EXPORTING EMERGING ASIA HONG KONG CANADA OTHER EUROPE BRI JAPAN OTHER ADVANCED SWITZERLAND OFFSHORE USA UNITED KINGDOM Liabilities Assets Foreign assets and liabilities (in percent of GDP)

20 The importance of offshore centers Oil exporters Singapore Emerging Asia FDI Port equity Other inv Portfolio debt China Other advanced d Canada BRI Japan Sum of external assets and liabilities (billions of US dollars) Offshore centers Switzerland Hong Kong Euro Area United Kingdom United States

21 The external portfolio of emerging markets: I. Assets Oil exp. USA Euro Area Singapore Other advanced Other emerging Hong Kong and Singapore Offshore BRI External assets (USD billions) Emg Asia China Hong Kong ,000 1,500 2,000 2,500 3,000

22 The external portfolio of emerging markets: II. Liabilities Oil exp. Singapore China Em Asia USA Euro Area Other advanced Hong Kong and Singapore Other emerging Offshore External liabilities (USD billions) BRI Hong Kong ,000 1,500 2,000 2,500

23 Decline in value of portfolio equity claims on US, euro area, UK BRI Portfolio equity shock (20% decline in stock values in EUR, UK, US) China Emg Asia Japan Oil exp euro area USA Singapore United States euro area United Kingdom UK Canada Oth Adv Hong Kong Switzerland -18% -16% -14% -12% -10% -8% -6% -4% -2% 0%

24 Decline in value of portfolio debt claims on US, euro area, UK USA Portfolio debt shock (20% decline in value of portfolio debt claims on EUR, UK, US) Canada BRI Oil exp euro area Emg Asia China United States Euro Area United Kingdom Oth Adv UK Japan Switzerland Hong Kong Singapore -35% -30% -25% -20% -15% -10% -5% 0%

25 Impact of a decline in value in claims on emerging markets Emerging market shock (20% decline in the value of claims on emerging markets) BRI Canada Japan Oil exp emerging Asia HK and SGP Other Oth Adv Emg Asia USA China euro area UK Switzerland -12% -10% -8% -6% -4% -2% 0%

26 Work in progress Relation between residence-based and ultimate-exposure data for claims and liabilities associated with banks Smaller role of international financial centers Example: much smaller positions of UK banks vis-à-vis euro area than suggested by residencebased data

27 Summary Data work piece of a complex puzzle Sectoral exposures Currency exposures Ultimate exposures data gaps still serious (particularly for offshore centers, oil exporters, emerging markets).but a useful map of cross-border financial linkages

28 Summary y( (II) Intriguing stylized facts Lack of correspondence between net and gross positions Large role of international financial centers Heterogeneity in gross and net portfolio structures US systematically long equity, short debt More limited role of emerging markets Analysis sheds light on what can lie behind data coverage holes

29 Extra charts

30 Euro Area: composition of net position Japan Switzerland Oil exporters Canada FDI Other inv Port equity Portfolio debt China Singapore Other advanced Net foreign assets (in percent of GDP) Emerging Asia BRI United Kingdom United Statest Offshore centers Other Europe

31 Japan s foreign assets and liabilities BRI OIL EXPORTING CHINA CANADA SWITZERLAND EMERGING ASIA HONG KONG SINGAPORE OTHER ADVANCED OFFSHORE UNITED KINGDOM EURO AREA USA Liabilities Assets Foreign assets and liabilities (in percent of GDP)

32 United Kingdom: composition of gross position Emerging Asia Singapore BRI FDI Port equity Other inv Portfolio debt Canada Oil exporters Hong Kong Japan Sum of external assets and liabilities (in percent of GDP) Other advanced Switzerland Other Europe Offshore centers United States Euro Area

Bilateral Cross-Border Holdings and Global Imbalances: A View on the Eve of the Global Financial Crisis 1

Preliminary and incomplete, comments welcome Bilateral Cross-Border Holdings and Global Imbalances: A View on the Eve of the Global Financial Crisis 1 Gian Maria Milesi-Ferretti International Monetary