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.

Introduction

Two phenomena over the last decade

Emergence of global imbalances

Financial integration (growth of cross-border flows)

Worries about global imbalances…

…but initial transmission of the crisis through gross exposures

Bilateral perspective key in understanding crisis transmission

Relation between the two phenomena?

What we do in this paper

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

Research Questions

Is there a relation between the geographical 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?

Data strengths and weaknesses

Strengths:

Network of cross-border financial linkages from a

geographical (residence) perspective

Consistent with balance of payments data

Weaknesses:

No information on currency of denomination

Does not necessarily measure ultimate exposures

Related work

Kubelec and Sa (2009, 2010)

Bilateral positions for 18 countries, 1980-2005

Relies on estimation to fill gaps

Daude and Fratzscher (2007)

Gravity-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)

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)

What do we know from aggregate data?

I. Net external positions

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US Jpn Chn EMA oil Eur surplus Eur deficit ROW

What do we know from aggregate data?

II. Gross external assets

23%

20%

14%

10%

9%

6%

5%

4%

4% 3% 2% Euro Area

United States

United Kingdom

Other advanced

Offshore

Japan

Emg Asia incl China

HK + SGP

ROW

Oil exporters

BRI

Data coverage

(in pct of total reported assets and liabilities)

0

20

40

60

80

100

120

140

160 Assets Liabilities

Bilateral data coverage

(in percent of total identified assets and liabilities)

Gaps in data coverage

(billions of USD)

-500

0

500

1000

1500

2000

2500

3000

3500

4000

Assets Liabilities

"Gaps" in bilateral data coverage

(billions of US dollars)

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 2,271 Total euro area 1,357 Luxembourg 1,100 France 415 Ireland 733 Netherlands 260 Netherlands 271 Italy 248 Spain 106 Germany 167

The United States: net position

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2

CANADA

BRI

OTHER ADVANCED

SWITZERLAND

HONG KONG

EMERGING ASIA

SINGAPORE

UK

EURO AREA

OIL EXPORTING

OFFSHORE

JAPAN

CHINA

Net foreign assets

(in percent of GDP)

The United States: gross position

0 5 10 15 20 25 30 35

EURO AREA

OFFSHORE

UK

JAPAN

CHINA

CANADA

OTHER ADVANCED

SWITZERLAND

EMERGING ASIA

OIL EXPORTING

BRI

SINGAPORE

HONG KONG

Liabilities Assets

Foreign assets and liabilities

(in percent of GDP)

United States: composition of net position

-10 -8 -6 -4 -2 0 2 4 6 8

Canada

BRI

Other advanced

Other Lat. Am.

Switzerland

Hong Kong

Emerging Asia

Singapore

United Kingdom

Euro Area

Oil exporters

Offshore centers

Japan

China

FDI

Port equity

Other inv

Portfolio debt

Net foreign assets

(in percent of GDP)

Euro Area: net position

-6 -4 -2 0 2 4 6

JAPAN

SWITZERLAND

OIL EXPORTING

HONG KONG

CANADA

CHINA

SINGAPORE

OTHER ADVANCED

EMERGING ASIA

BRI

UNITED KINGDOM

USA

OFFSHORE

OTHER EUROPE

Net foreign assets

(in percent of GDP)

Euro area: gross positions

0 10 20 30 40 50 60

UNITED KINGDOM

USA

OFFSHORE

SWITZERLAND

OTHER ADVANCED

JAPAN

BRI

OTHER EUROPE

CANADA

HONG KONG

EMERGING ASIA

OIL EXPORTING

SINGAPORE

CHINA

Liabilities Assets

Foreign assets and liabilities

(in percent of GDP)

The importance of offshore centers

0 1000 2000 3000 4000 5000 6000 7000

United States

United Kingdom

Euro Area

Hong Kong

Switzerland

Offshore centers

Japan

BRI

Canada

Other advanced

China

Emerging Asia

Singapore

Oil exporters

FDI Port equity Other inv Portfolio debt

Sum of external assets and liabilities

(billions of US dollars)

The external portfolio of emerging markets:

I. Assets

0 500 1.000 1.500 2.000 2.500 3.000

Hong Kong

China

Emg Asia

BRI

Singapore

Oil exp.

USA Euro Area

Other advanced Hong Kong and Singapore

Other emerging Offshore

External assets

(USD billions)

The external portfolio of emerging markets:

II. Liabilities

0 500 1.000 1.500 2.000 2.500

Hong Kong

BRI

Em Asia

China

Singapore

Oil exp. USA

Euro Area

Other advanced

Hong Kong and Singapore

Other emerging

Offshore

External liabilities

(USD billions)

Decline in value of portfolio equity claims on

US, euro area, UK

-18% -16% -14% -12% -10% -8% -6% -4% -2% 0%

Switzerland

Hong Kong

Oth Adv

Canada

UK

Singapore

USA

euro area

Oil exp

Japan

Emg Asia

China

BRI

United States euro area United Kingdom

Portfolio equity shock (20% decline in stock values in

EUR, UK, US)

Decline in value of portfolio debt claims on

US, euro area, UK

-35% -30% -25% -20% -15% -10% -5% 0%

Singapore

Hong Kong

Switzerland

Japan

UK

Oth Adv

China

Emg Asia

euro area

Oil exp

BRI

Canada

USA

United States Euro Area United Kingdom

Portfolio debt shock

(20% decline in value of portfolio debt claims on EUR, UK, US)

Impact of a decline in value in claims on

emerging markets

-12% -10% -8% -6% -4% -2% 0%

Switzerland

UK

euro area

China

USA

Emg Asia

Oth Adv

Oil exp

Japan

Canada

BRI

emerging Asia

HK and SGP

Other

Emerging market shock

(20% decline in the value of claims on emerging markets)

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 residence-

based data

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

Summary (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‟

Extra charts

Euro Area: composition of net position

-8 -6 -4 -2 0 2 4 6 8

Other Europe

Offshore centers

United States

United Kingdom

BRI

Emerging Asia

Other advanced

Singapore

China

Canada

Oil exporters

Switzerland

Japan FDI Port equity

Other inv Portfolio debt

Net foreign assets

(in percent of GDP)

Japan‟s foreign assets and liabilities

0 5 10 15 20 25 30 35 40 45 50

USA

EURO AREA

UNITED KINGDOM

OFFSHORE

OTHER ADVANCED

SINGAPORE

HONG KONG

EMERGING ASIA

SWITZERLAND

CANADA

CHINA

OIL EXPORTING

BRI

Liabilities Assets

Foreign assets and liabilities

(in percent of GDP)

United Kingdom: composition of gross position

0 50 100 150 200 250 300 350 400

Euro Area

United States

Offshore centers

Other Europe

Switzerland

Other advanced

Japan

Hong Kong

Oil exporters

Canada

BRI

Singapore

Emerging Asia

FDI Port equity Other inv Portfolio debt

Sum of external assets and liabilities

(in percent of GDP)