Tuesday, 6 September 2011

Some systemic thoughts on free trade and capital mobility...

As I usually do, I was trawling through some data today and came across a really interesting tidbit.

In the next chart I have plotted the total amounts outstanding for debt securities issued by EU non-financial corporations, denominated in EUR. 

source: Eurostat

As you can probably make out from the chart, since early 2010 there has been a slight downward trend in the total amounts outstanding of debt securities. This has never happened again in the time for which data are available. Well, I know that 1991 isn’t a long time back, but all the same this is a rather significant apparition. All other declines in amounts outstanding were mere blips but this seems to be something of a higher order.

During the past few decades, access to funding for corporations has risen to an unprecedented scale. This particular fact along with deregulation and the opening of emerging markets' trade and capital accounts has increased international trade volumes and capital mobility significantly.

Of course, one could say that the total amount outstanding of debt securities is dwarfed by the size of bank credit and that this remains the main funding source for firms. We should keep in mind though that, at least in the EU, only the larger and most respected corporations have access to the bond markets, i.e. the crème de la crème of the corporate universe. 

Besides bank credit is also stagnant and I can’t see any reason why it would resume an upwards move anytime soon.

source: Eurostat

 To complete the roundup, we could take a look at equity, the last remaining funding source for firms (except from retained earnings that is). 

source: Eurostat

Those possessing even the most superficial knowledge of technical analysis could be asking themselves whether this resembles a Head and Shoulders formation in the making, well I do ask myself the same question (this is not a call on the direction of equity prices so don’t treat as such)…

Could all this be something more than a blip? Could this signal some systemic changes? Could this signal that the time of free trade and free capital movements is slowly coming to a close? All the facts outlined above tell me that the firing power of firms will be reduced and in such times of crisis, the other factor determining capital mobility, regulatory changes, is a bit of a wild card. The other time that something similar did happen was during the Great Depression. If you ask me the current background picture right now bears some striking similarities with the one back then… 

P.S. I want to make clear that this is in no way a politically-coloured post or anything of that order. I just tried to give an interpretation of a few facts that I think of as quite startling.


  1. The declining debt securities could be related to the collapse of housing markets in Ireland, Spain, Italy, Greece. The housing markets in Spain, Ireland, Italy and Greece have not yet reversed to a value justified by inflation.

  2. Through those graph it really explains why is there some upwards and downwards in the market or free trade. Also, thanks for EuroStats for providing these graphs.

    Capital Accounts Collection