European Financial Linkages
A New Look At Imbalances1

Contributor Notes

Authors’ E-Mail Addresses: cwaysand@imf.org; kross@imf.org; jdeguzman@imf.org

We document external investment positions among European Union countries at the start of the financial crisis through the creation of a new database comprising bilateral external financial asset and liabilities, excluding reserve assets and derivatives. While there are some gaps in the data, the overall coverage of reported bilateral net international investment positions (IIPs) appears satisfactory. The dataset provides a richer picture of financial linkages, enabling us to map the financing of Euro area imbalances. Creditor and debtor positions vis-à-vis the rest of the EU have tended to increase between 2000 and 2008, with capital flowing largely from wealthier to catching-up economies. This has in particular resulted in an increased interdependency among Euro Area economies.

Abstract

We document external investment positions among European Union countries at the start of the financial crisis through the creation of a new database comprising bilateral external financial asset and liabilities, excluding reserve assets and derivatives. While there are some gaps in the data, the overall coverage of reported bilateral net international investment positions (IIPs) appears satisfactory. The dataset provides a richer picture of financial linkages, enabling us to map the financing of Euro area imbalances. Creditor and debtor positions vis-à-vis the rest of the EU have tended to increase between 2000 and 2008, with capital flowing largely from wealthier to catching-up economies. This has in particular resulted in an increased interdependency among Euro Area economies.

I. Introduction

Financial integration, both at the global and intra-European Union (EU) level, has helped to facilitate the development of large current account imbalances within the EU as well as within the Euro area during its first few years of existence. In large part, financing these imbalances was made easier through the elimination of foreign exchange risk premia, both for countries that originally adopted the Euro and for those with a perspective to adopt in the near term.

In this context, the perception that these external imbalances could be the reflection of internal unsustainable developments has only gained ground slowly over time. Nevertheless, the recent emergence of rapid deleveraging processes in some of the EU countries that had experienced previous booms and large current account deficits made evident the need to better understand intra-EU, and Euro area, financial linkages. While there had been several attempts to estimate these linkages, to date, a detailed decomposition of actual bilateral financial positions has been missing.

Against this background, the main aim of this paper is to construct a database which documents actual bilateral external financial positions for most European countries. The database used in our analysis contains bilateral assets, liabilities, as well as net bilateral positions vis-à-vis a range of about 200 countries.2 Improved country reporting and the existence of complementary databases describing external assets and liabilities now allow for the gaps in bilateral asset and liability positions to be largely filled, except for reserves and financial derivatives.

Nevertheless, it is important to note the limitations of our database. Discrepancies between reported bilateral data and overall aggregates are especially prevalent in the case of Luxembourg. Similarly, while discrepancies largely compensate each other in the case of Switzerland, there is wide uncertainty on the size of claims and liabilities of actual residents. Data are also overall of a lesser quality for a number of Member States that joined the EU in 2004 and 2007, as their reporting is, so far, less comprehensive. For most other EU countries, gaps between reported aggregates by financial instrument and the sum of allocated bilateral positions are around 15 percent of total liabilities and slightly lower on the asset side.

Different uses can be made of this database. In this paper, we mainly use it to derive a number of stylized facts on the financing of imbalances of EU countries—a natural complement to Milesi-Ferretti, Strobbe and Tamirisa (2010), and hence largely concentrate on net positions. From a risk and contagion point of view, however, gross positions, also reported in the database and some of our tables, are more relevant. In this respect, one has to keep in mind that the choice we made—using locational (and not consolidated, on an ultimate risk principle) statistics for cross-border credits and loans—is consistent with balance of payment principles and with the mapping of imbalances among countries. However, BIS consolidated statistics (on an ultimate risk basis, i.e., adjusted for risk transfers) offer a more relevant picture of a country banking sector’s exposure. Thus, a risk mapping exercise could use bilateral portfolio and FDI positions as reported in the base, together with consolidated BIS data on an ultimate risk for credits and deposits.

After recalling the related literature in section II and describing briefly the construction and the limitations of the database in section III, we identify financing patterns of deficit countries and investment patterns of surplus countries in the European Union in section IV. Section V concludes.

II. Related literature

This work is at the intersection of two different strands of literature, relating to Euro area imbalances and external financial positions.

Intra-Euro area and intra-EU imbalances

There is no reason why positions of constitutive countries or states should be in balance within a monetary union. As noted by Greenspan in 20043, states in the US probably had significant current account imbalances over time without precipitating interstate balance-of-payments crises. Indeed, while the role of exchange rate regimes in explaining current account dynamics is not settled4, the absence of exchange rate premium helps to facilitate the financing of current account deficits.

Current account deficits across Euro area and EU countries were for some time viewed as benign. Capital flows originated from wealthier European countries, with higher GDP and capital per capita endowments, and to feed into catching up economies, with lower GDP per capita and endowments, thus facilitating their convergence. This was in line with theoretical predictions and seen as contradicting Feldstein and Horioka (1980) analysis that levels of savings and investment were very correlated as well as Lucas’ (1990) observation that capital did not flow from “rich to poor countries”. Europe was, on the contrary, confirming the benefits of financial integration (see for instance Blanchard and Giavazzi (2002), Abiad, Leigh and Mody (2007), Schmidtz and von Hagen (2009), and also Bakker and Gulde (2010) for a more extensive review of the literature on flows to Emerging European countries).

The perception that growing external imbalances could be the reflection of internal unsustainable developments even in the Euro area, with the building up of an excessive indebtedness of private or public agents likely to result in painful adjustment periods, nevertheless gained ground over time (see inter alia Gourinchas (2002), Ahearne and Pisani-Ferry (2006), Blanchard (2006), European Commission (2006, and following years), Guyon (2007)). The emergence of deleveraging processes in some of the EU countries that had experienced previous booms and large and persistent current account deficits put in a way a closure to the debate—and modalities for taking into account these imbalances in a systematic way in EU policy advice are now being agreed upon at EU level.

Bilateral financial linkages at global level

The growth in cross-border claims and global imbalances has sparked interest in documenting external positions in order to more fully understand financial inter-linkages and contagion channels. Following Lane and Milesi-Ferretti (2001; 2007), who constructed a database containing estimates of aggregate International Investment positions (IIP) for 145 countries over the 1970-2004 period5, updated and extended in 2007 (External Wealth of Nations, Mark II - EWNII), a number of papers have investigated global level bilateral linkages.

Kubelec and Sá (2010) constructed a dataset on stocks of bilateral external assets and liabilities for 18 countries over the 1980-2005 period. However, given their global perspective, while their sample included 6 of the largest European countries, 5 of which in the European Union, it did not cover key creditor and debtor economies within Europe.6 Also, gravity models had to be used to estimate missing data since detailed bilateral positions were generally not readily available for most countries for the period under consideration. Lane and Shambaugh (2010) built a comprehensive data base for the period 1990-2005, including inter alia most European countries; but as they were concentrating on major currency exposures, they did not detail intra-EU, and a fortiori, not intra-Euro area bilateral assets and liabilities.

More recently, Milesi-Ferretti, Strobbe and Tamirisa (2010) have computed a dataset with bilateral assets and liabilities of about 70 countries, covering 15 large countries or country groupings—and offering a complete mapping of the financing of global imbalances. Given their focus, however, Euro area and Emerging Europe were treated as a whole.

Bilateral financial linkages in the EU and the Euro area

There had been several efforts to better map financial inter-linkages among EU, or Euro area, countries. Several studies have exploited portfolio investment data (CPIS) when they became available (inter alia: Lane and Milesi-Ferretti, 2005, Lane, 2006, Coeurdacier and Martin 2006), showing the existence of a “Euro area bias”. Others aimed at characterizing the patterns of financial flows but had to use indirect measures, such as bilateral trade balances (Schmidtz and von Hagen (2009)) as a proxy for capital flows –a non-trivial assumption in view of our results. Several papers examined divergences in current account balances (Blanchard and Giavazzi (2002), Abiad, Leigh and Mody (2007)) and tried to explain the observed patterns. Their shared conclusion was that capital seemed to flow from higher GDP per capita economies to lower GDP per capita ones. Finally, a number of papers have used BIS consolidated bilateral data (e.g. Árvai, Driessen, and Ötker-Robe (2009); Tressel (2010)) to investigate possible contagion channels.

There was, however, no view encompassing various financing instruments and describing intra Euro area and intra EU bilateral positions.

III. Methodology

A. Main Principles

The data set covers 29 reporting European countries over the 2001 to 2008 period7—with bilateral positions reported against over 200 partner countries. All data are in US dollars8.

To construct the database, we follow the IIP classifications from the 5th revision of the Balance of Payments Manual (IMF, 1993).9 The manual follows the residency principle10; thus external assets and liabilities are claims between a country’s residents and non-residents. Ideally, we would like to have information on all possible forms of bilateral holdings: Reserve assets; foreign direct investment; portfolio investment; financial derivatives; and Other investment.

However, we do not have bilateral information on financial derivatives and foreign exchange reserves. We therefore subtract aggregate financial derivatives, taken from national sources (as reported to the IMF’s electronic data statistical system), and aggregate total foreign reserves assets, taken from the IMF’s Balance of Payment Statistics (BPTS), from the aggregate IIP figures that we are trying to decompose.

The end-of-year bilateral stock positions (asset and liabilities) are thus documented or estimated for the following categories:

  • Foreign direct investment;11

  • Portfolio investment, divided into equity and debt securities; and

  • Other investment.

Finally, data in the base represent stocks of assets and liabilities. As a consequence, variations across time have to be interpreted cautiously as they can be attributed to transactions during the period considered, but also to revaluation effects –due to a change in the nominal value of assets and/or in the exchange rate—or may reflect revisions.

Data sources

For the most part, bilateral data is pulled from multilateral sources (see Appendix I for more details):

  • For direct investment, the main data source is the OECD, FDI positions by partner country. The OECD Benchmark Definition recommends market value as the conceptual basis for valuation. Market valuation places all assets at current prices rather than when purchased or last revalued, and allows comparability of assets of different vintages. It allows for consistency between flows and stocks of assets of different enterprises, industries, and countries, as well as over time. However, in practice book values from the balance sheets of direct investment enterprises (or investors) are generally utilized to determine the value of the stocks of direct investment.12 Data on bilateral investment should be improved through the IMF’s ongoing Coordinated Direct Investment Survey (CDIS).

  • For portfolio investment, the main data source is the IMF’s Coordinated Portfolio Investment Survey (CPIS). The CPIS provides information on individual economy year-end holdings of portfolio investment securities (equity securities and debt securities) valued at market prices, cross-classified by the country of issuer of the securities. Participation in the CPIS is voluntary and some 75 economies currently participate in the survey. Participating countries report asset positions, and are encouraged to report liabilities but most do not. Liabilities are therefore estimated in CPIS database as a “mirror” from creditor positions. To the extent that not all countries participate in the CPIS, the sum of derived bilateral liabilities usually falls short of the reported EDSS aggregate.

  • Other investment is taken from the Bank for International Settlements (BIS) Locational Banking Statistics. To avoid double counting of portfolio instruments, the balance sheet items we include in this category are those reported under “loans and deposits”13. Other investment consists of two components that are added up: Other investment from banks and Other investment from non banks.

Other investment from banks comprises loans and deposits made by banks to non-residents in all currencies, including interbank borrowing and loans and inter-office balances. For BIS participating countries, reported data is directly used to describe bilateral banking claims and liabilities. For BIS non-reporting countries, however, we have to use mirror data on both the asset and liability sides:14 information on country A banks’ claims and liabilities vis-à-vis country B is provided through country B banks’ reporting, provided B is a reporting country (see Appendix I).

Other investment from non-banks corresponds to underlying financial transactions made by non-banks, such as trade credit claims, financial leases, as well as insurance and pension claims. It is derived using (incomplete) mirror data: our information on Other investment claims of country A non-banks vis-à-vis country B is limited to the one provided by country B banks reporting their liabilities vis-à-vis country A non-banks. Thus, if B is a non-BIS reporting country, we have no information on Other investment claims of country A non-banks vis-à-vis B, and in all cases we miss relations between non-banks and non-banks.

It is important to note the use of locational BIS data, as opposed to BIS data on a consolidated basis. The former, based on residency, is consistent with balance of payments data and IIP, while the latter is not. Consolidated data on an ultimate basis represents the best snap shot of total bank exposures15. Annex II discusses some of the differences and presents a comparison of total bank assets of European reporting countries measured from locational or residency basis, against the BIS data on a consolidated, ultimate risk, basis.

While our analysis relies on a wider set of data, the restricted nature of BIS figures places some constraints on our reporting. One should not be able to derive individual restricted data from our publicly available dataset. This requires us to report bilateral Other investment positions of, or vis-à-vis, groupings of countries in a number of cases—in particular for EU Member states that joined in 2004 or 2007, that do not document BIS locational statistics.

B. Gaps and Discrepancies

As a general point, one should have in mind that there are some inherent data limitations. There is uncertainty regarding the effective holder of a claim or a liability, as well as the economic nature of the claim, especially when intermediary vehicles (mutual funds, trustees) are involved. Felettigh and Monti (2008) describe them as introducing an “intermediation” and a “geographical veil” in CPIS data16. One should also keep in mind the possible asymmetry between positions reported by counterpart, i.e. liabilities reported by country A vis-à-vis B may not match assets reported by country B vis-à-vis A. This is especially the case for FDI data17. Like others, as a guiding principle, for each country, we retain data as reported by the country authorities

We try to estimate the size of the gaps in our data coverage. First, as noted above, we have no bilateral information on reserves and financial derivatives. For most countries, the sum of these aggregates represents less than 10 percent of total assets plus liabilities. This is, however, not the case for a number of Member states that acceded the EU in 2004 or 2007 – for which reserve assets amount to a substantial share of their external assets –nor for the UK, that plays a major role in the financial derivatives market (more than a third of its claims and liabilities). Second, there are also informational gaps in other sub-components of the IIPs. As a result, the sum of reported bilateral positions in FDI, portfolio, and other investment does not add up to gross asset and liability data stripped of financial derivatives and foreign reserve assets. Gaps stem in particular from the fact that the universe of CPIS and BIS reporting countries is incomplete, an acute problem when using (incomplete) mirror data.

The charts in Appendix I present the total amount of unallocated assets and liabilities by country at end-2008. For most EU advanced countries, the gaps are around 15 percent of total assets and liabilities. They are particularly small –as a share—for the U.K. but very large for Luxembourg (an additional reason for treating this country separately when we divide countries into groupings)18. Switzerland’s unallocated total assets are actually negative, primarily due to the fact that the sum of other investment bank bilateral claims were greater than the reported aggregates.19 Luxembourg’s gap is especially large since it reports minimal bilateral foreign direct investment and has large portfolio equity gaps—which may reflect non-complete data on cross border mutual fund industry claims. The data gaps in EU countries that joined in 2004 and 2007 vary, with limited gaps in Estonia, Bulgaria and Romania, but above average discrepancies in Lithuania, Latvia, Cyprus and Malta. Discrepancies are also large in Norway. In absolute amount, however, the most significant discrepancies are clearly those observed for Luxemburg and the UK.

Appendix I provides a summary of the data sources country by country and further description on the size of unallocated balances.

IV. Stylized Facts

A. External financial integration of the EU and the EA is high.

Financial integration is commonly measured as the sum of cross border assets and liabilities expressed as a percentage of GDP. The text chart plots financial integration over the period 1999-2008 for European groupings (excluding intra-zone claims), the US, and Japan for the period 1999 to 2009. Data exclude financial derivatives and reserves20. Following a more global trend, financial integration of the EU and the Euro area appears to have increased since Euro adoption. While the Euro Area as a whole has a relatively small negative external position (-17.7 percent of its GDP at end-2008, down to -12.4 percent at end Q2 2010), it is notable that its external assets and liabilities are relatively high compared with other large economic zones with much larger absolute IIPs, like the United States and Japan.

UF1

Total External Assets and Liabilities 1/

(Percent of GDP)

Citation: IMF Working Papers 2010, 295; 10.5089/9781455211760.001.A001

Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.1/ Excludes financial derivatives and reserve assets.

The strong inflexion observed in Euro Area assets and liabilities, excluding financial derivatives and reserves, in 2008 both reflects a strong slow-down in transactions and revaluation effects due to price, non-exchange rate related, adjustments. Reintegrating financial derivatives assets and liabilities would attenuate the inflexion, since the increase in the value of total assets and liabilities in the form of financial derivatives roughly doubled in 2008 compared with 2007 (to around +550 bn Euros).

B. However, internal financial integration among EU and EA countries is large as well.

Looking at the Euro area, and the EU, as a collection of countries allows us to assess the relative importance of intra zone financing within the two regions. For each country within the aggregate, external assets and liabilities here comprise all foreign assets and liabilities including those claims against countries within the zone, as well as against the rest of the world.

Other EU countries as a group constituted the first financial partner of both EU countries, and of Euro area countries, with around half of the total assets and liabilities. For the Euro area countries, assets and liabilities vis-à-vis other Euro area countries alone represented 40-45 percent of total assets or liabilities.

UF2

Total Internal Assets and Liabilities 1/

(Percent of GDP)

Citation: IMF Working Papers 2010, 295; 10.5089/9781455211760.001.A001

Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.1/ Excludes financial derivatives and reserve assets.

One has however to keep in mind that while coverage appears overall satisfactory, it is more complete on the asset side than on the liabilities side – resulting in a large negative unallocated IIP position both for the EU and for the Euro area, as pointed in Milesi-Ferretti, Strobbe and Tamirisa (2010).

When correcting for these un-tracked assets, EU assets and liabilities vis-à-vis EU countries represented around 2/3 of the allocated assets and liabilities and other Euro area countries accounted for a bit more than half of the tracked assets and liabilities of Euro area countries. Other patterns of EA financing (such as its main external partners and extra EA bilateral positions), as reflected in Figure 3b are broadly consistent with Milesi-Ferretti, Strobbe and Tamirisa (2010) and with previous works (Lane and Milesi-Ferretti, 2005, Lane, 2006).

C. While European countries EU and Euro Area IIPs broadly reflect their global IIPs, there are some marked differences.

The correlation between net positions vis-à-vis EU countries (in percent of GDP) and vis-à-vis Euro area countries is high (0.80). In most cases, countries with creditor (respectively debtor) positions vis-à-vis the EU also reported net creditor (debtor) positions vis-à-vis the Euro area as of end-2008. Austria was an exception, with large positive net assets on Member states that joined in 2004 and 2007 but negative IIP vis-à-vis the rest of the Euro area.

The correlation between global IIPs and the net positions vis-à-vis the EU at end-200 is a bit weaker (0.75). Indeed, while countries with negative net positions vis-à-vis other EU countries were also global debtor countries, i.e. had a negative global IIP (with the exception of Cyprus and Malta), the sign of global IIPs of countries with positive positions vis-à-vis the rest of the EU varied.

Some of these countries posted significant positive global IIP (Luxembourg, Belgium, Germany, and outside the EU, Switzerland and Norway), consistent with accumulated current account surpluses. Some others were globally debtor countries – this was the case at end 2008 for Austria, France, Finland, Denmark and the UK.

Consistently with its global positive IIP, Germany had recourse to limited financing from abroad (Japan, Switzerland and France), while its large savings were being channeled to UK, Spain, Ireland and the US, often in the form of credits and loans (see Figure 4A).

France or the UK had for instance more of a role of financial intermediaries (see Figures 4A and E), with France receiving financing from other financial centers, including from the US, largely in the form of deposits and loans to its financial institutions, and holding large debt bonds vis-à-vis other Euro area countries, in addition to extending loans to Spain and Italy. The UK picture had some resemblance with France, but with two important differences –the UK had large net assets on the US, and funding through deposits and loans was a more important instrument of financing.

Table 1.

Net Investment Positions and GDP per Capita, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Net bilateral IIPs exclude financial derivatives and reserve assets, whereas Net Global IIPs include them.

Nominal GDP per capita.

Euro Area country composition in 2008.

D. EU and EA countries have accumulated significant external positions vis-à-vis other EU and EA countries, with capital flowing from more advanced economies to those with a lower GDP per capita.

Several studies have concluded that in the European Union, financial integration has weakened the link between saving and investment levels and have enabled countries with lower GDP per capita to develop current account deficits—and hence to receive positive net inflows, while countries with higher GDP per capita tended to develop surpluses (Blanchard and Giavazzi (2002) and Abiad, Leigh and Mody (2007)). The same conclusion was derived using trade balances as a proxy of bilateral flows (Schmidtz and von Hagen (2009)). There was however no direct measure of intra EU, or intra Euro area, financing. Our database provides such a measure—the net financial assets positions accumulated vis-à-vis the rest of the EU, or vis-à-vis the rest of the Euro area.

We restrict the analysis to EU and Euro area countries in 2002 (Figure 1) and in 2008 (Figure 2) and consider IIPs vis-à-vis the relevant group of countries21. Like others, we also exclude from our analysis Luxembourg, which appears to be a clear outlier (see Figures 1 and 2) and Ireland (an outlier especially in 2008).

Figure 1.
Figure 1.

Euro Area and European Union: Net Financial Positions and GDP per Capita, 2002 1/

Citation: IMF Working Papers 2010, 295; 10.5089/9781455211760.001.A001

Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.1/ Positions based on 2002 European Union and Euro Area country compositions.
Figure 2.
Figure 2.

Euro Area and European Union: Net Financial Positions and GDP per Capita, 2008 1/

Citation: IMF Working Papers 2010, 295; 10.5089/9781455211760.001.A001

Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.1/ Positions based on 2002 European Union and Euro Area country compositions.
Figure 3A.
Figure 3A.

Net Foreign Assets and Gross Positions: European Union Countries, 2008

(Percent of GDP)

Citation: IMF Working Papers 2010, 295; 10.5089/9781455211760.001.A001

Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.Notes: EACC - Euro area creditor countries; EACLFN - Euro area countries with limited financing needs; EACSFN - Euro area countries with significant financing needs; LUX - Luxembourg; CYMAS - Cyprus, Malta and Slovenia; EUCC - Other EU creditor countries; NMS - Non-Euro area countries that acceded in 2004 or 2007; SN - Switzerland and Norway; USA - United States; JPN - Japan; BRIC - Brazil, Russia, India and China.
Figure 3B.
Figure 3B.

Net Foreign Assets and Gross Positions: Euro Area Countries, 2008

(Percent of GDP)

Citation: IMF Working Papers 2010, 295; 10.5089/9781455211760.001.A001

Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.Notes: EACC - Euro area creditor countries; EACLFN - Euro area countries with limited financing needs; EACSFN - Euro area countries with significant financing needs; LUX - Luxembourg; CYMAS - Cyprus, Malta and Slovenia; EUCC - Other EU creditor countries; NMS - Non-Euro area countries that acceded in 2004 or 2007; SN - Switzerland and Norway; USA - United States; JPN - Japan; BRIC - Brazil, Russia, India and China.

The dispersion of EU countries net external positions vis-à-vis the rest of the EU, as well as the dispersion of Euro area countries net external positions vis-à-vis the rest of the Euro area, have increased between 2002 and 2008 - consistently with the well established observation of an increase and persistence in current accounts dispersion across Euro area countries.

Between these two dates, within both the EU and the Euro area, the correlation between IIPs vis-à-vis the group and GDP per capita has increased. Admittedly, our database contains stocks, not flows. There is no reason, however, why valuation effects on stocks would result in a positive correlation between IIP vis-à-vis the rest of the EU and GDP per capita. Indeed, looking only at the valuation effect on stocks of assets and liabilities, everything else being equal, real convergence, translating into higher productivity gains and a real effective appreciation, would contribute to inflating the value of liabilities (notably FDI and portfolio, equity holdings) relative to the value of the assets for catching up economies, hence would per se depress IIP positions. Rather, the observation both within the EU and within the Euro area of a strong correlation between IIPs vis-à-vis the rest of zone and GDP per capita is a strong indication that within these two zones, capital appears to have flown from wealthier countries to catching up economies. The results would a fortiori hold if we compared the situation of countries in the EU (respectively members of the Euro Area) in 2008 with the situation of the same countries in 2002.

Finally, a correlation between global IIP and GDP per capita among EU (EA) countries also exists, which is not surprising given the strong correlation between global IIPs and IIPs vis-àvis the EU or the EA, but it is weaker. It is also consistent with the findings of Lane and Milesi-Ferretti (2007) which find an overall correlation of 0.43 between IIPs and GDP per capita at end 2004, with a stronger correlation among developed countries.

E. Top net creditors or debtors do not necessarily coincide with top trade partners nor with main financial partners on a gross basis.

The link between trade and net financial relationships is tenuous. Tables 2A-F contain, for each country for which we can provide the information22, the main bilateral net financial positions and accumulated bilateral trade imbalances over 1998-2008.23 A quick examination suffices to suggest that bilateral trade relations appear to be a poor proxy for bilateral financing relationships. For instance, the largest bilateral accumulated trade surplus of France between 1998 and 2008 was with the UK while its largest deficit was with Germany. But the UK happened to be the second largest net creditor of France at end-2008 and Germany the fifth largest debtor. Germany exhibited more similarity than most other countries between trade and financial links, though its relationships with France suggested the opposite, with significant assets vis-à-vis a number of countries with which it accumulated surpluses (the UK, Spain, Italy and the US) and conversely liabilities vis-à-vis Japan mirroring its accumulated trade deficits with this country.

Table 2A.

Top Financial and Trade Positions: Euro Area Creditor Countries, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Top seven positive (negative) net foreign asset positions at end-2008.

Top seven bilateral trade balances, accumulated from 1998 to 2008.

Notes:

  • Visegrad Countries are Czech Republic, Hungary, Poland and Slovakia.

  • Baltics is composed of Estonia, Latvia and Lithuania.

  • Other Offshore Centers exclude the Cayman Islands, Guernsey and Jersey, for which bilateral data are available.

  • Rest of the World is composed of BIS non-reporting countries excluding the Visegrad Countries, the Baltics, Other Offshore Centers and International Organizations.

Table 2B.

Top Financial and Trade Positions: Euro Area Countries with Limited Financing Needs, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Top seven positive (negative) net foreign asset positions at end-2008.

Top seven bilateral trade balances, accumulated from 1998 to 2008.

Notes:

  • Visegrad Countries are Czech Republic, Hungary, Poland and Slovakia.

  • Baltics is composed of Estonia, Latvia and Lithuania.

  • Other Offshore Centers exclude the Cayman Islands, Guernsey and Jersey, for which bilateral data are available.

  • Rest of the World is composed of BIS non-reporting countries excluding the Visegrad Countries, the Baltics, Other Offshore Centers and International Organizations.

Table 2C.

Top Financial and Trade Positions: Euro Area Countries with Significant Financing Needs, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Top seven positive (negative) net foreign asset positions at end-2008.

Top seven bilateral trade balances, accumulated from 1998 to 2008.

Notes:

  • Visegrad Countries are Czech Republic, Hungary, Poland and Slovakia.

  • Baltics is composed of Estonia, Latvia and Lithuania.

  • Other Offshore Centers exclude the Cayman Islands, Guernsey and Jersey, for which bilateral data are available.

  • Rest of the World is composed of BIS non-reporting countries excluding the Visegrad Countries, the Baltics, Other Offshore Centers and International Organizations.

Table 2D.

Top Financial and Trade Positions: Other Euro Area Countries, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Top seven positive (negative) net foreign asset positions at end-2008.

Top seven bilateral trade balances, accumulated from 1998 to 2008.

Notes:

  • Visegrad Countries are Czech Republic, Hungary, Poland and Slovakia.

  • Baltics is composed of Estonia, Latvia and Lithuania.

  • Other Offshore Centers exclude the Cayman Islands, Guernsey and Jersey, for which bilateral data are available.

  • Rest of the World is composed of BIS non-reporting countries excluding the Visegrad Countries, the Baltics, Other Offshore Centers and International Organizations.

Table 2E.

Top Financial and Trade Positions: Other European Union Creditor Countries, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Top seven positive (negative) net foreign asset positions at end-2008.

Top seven bilateral trade balances, accumulated from 1998 to 2008.

Notes:

  • Visegrad Countries are Czech Republic, Hungary, Poland and Slovakia.

  • Baltics is composed of Estonia, Latvia and Lithuania.

  • Other Offshore Centers exclude the Cayman Islands, Guernsey and Jersey, for which bilateral data are available.

  • Rest of the World is composed of BIS non-reporting countries excluding the Visegrad Countries, the Baltics, Other Offshore Centers and International Organizations.

Table 2F.

Top Financial and Trade Positions: Switzerland and Norway, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Top seven positive (negative) net foreign asset positions at end-2008.

Top seven bilateral trade balances, accumulated from 1998 to 2008.

Notes:

  • Visegrad Countries are Czech Republic, Hungary, Poland and Slovakia.

  • Baltics is composed of Estonia, Latvia and Lithuania.

  • Other Offshore Centers exclude the Cayman Islands, Guernsey and Jersey, for which bilateral data are available.

  • Rest of the World is composed of BIS non-reporting countries excluding the Visegrad Countries, the Baltics, Other Offshore Centers and International Organizations.

A few countries appear among the main financial partners of EU advanced economies, while there is more diversity for Emerging Europe. Tables 3A-F contain the main gross financial partners, from an asset and a liability point of view. For most advanced EU economies, partners were concentrated on a limited number of countries with large financial centers—as evident in the recurrence of France, Germany, Luxembourg, Netherlands, the UK and the US among the top seven partners. The relative importance of large financial centers was somewhat weaker for emerging Europe economies, with Austria being frequently among the largest partners for Central and Eastern European Countries and sometimes Italy (in spite of the fact that the use of locational banking data understated their exposures), while the data confirmed the importance of Nordic countries financing for the Baltic countries.

Table 3A.

Top Gross Financial Partners: Euro Area Creditor Countries, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Top seven foreign asset positions at end-2008.

Top seven foreign liability positions at end-2008.

Notes:

  • Visegrad Countries are Czech Republic, Hungary, Poland and Slovakia.

  • Baltics is composed of Estonia, Latvia and Lithuania.

  • Other Offshore Centers exclude the Cayman Islands, Guernsey and Jersey, for which bilateral data are available.

  • Rest of the World is composed of other BIS non-reporting countries excluding the Visegrad Countries, the Baltics, Offshore Centers and International Organizations.

Table 3B.

Top Gross Financial Partners: Euro Area Countries with Limited Financing Needs, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Top seven foreign asset positions at end-2008.

Top seven foreign liability positions at end-2008.

Notes:

  • Visegrad Countries are Czech Republic, Hungary, Poland and Slovakia.

  • Baltics is composed of Estonia, Latvia and Lithuania.

  • Other Offshore Centers exclude the Cayman Islands, Guernsey and Jersey, for which bilateral data are available.

  • Rest of the World is composed of other BIS non-reporting countries excluding the Visegrad Countries, the Baltics, Offshore Centers and International Organizations.

Table 3C.

Top Gross Financial Partners: Euro Area Countries with Significant Financing Needs, 2008

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Sources: IMF database constructed with data from BIS, OECD, ECB and national sources; and WEO.

Top seven foreign asset positions at end-2008.

Top seven foreign liability positions at end-2008.

Notes:

  • Visegrad Countries are Czech Republic, Hungary, Poland and Slovakia.

  • Baltics is composed of Estonia, Latvia and Lithuania.

  • Other Offshore Centers exclude the Cayman Islands, Guernsey and Jersey, for which bilateral data are available.

  • Rest of the World is composed of other BIS non-reporting countries excluding the Visegrad Countries, the Baltics, Offshore Centers and International Organizations.