Capital Inflows to Greece, Spain, Portugal and Ireland: A Sector-Level View

Greece, Spain, Portugal and Ireland have accumulated large foreign net liabilities, exposing them to increased financial market pressure during the current crisis period. This analysis decomposes cumulated lending and borrowing over the past decade into sector-level contributions and compares them with the euro area average. It shows strong borrowing by households and non-financial corporations with government further increasing net borrowing in Greece and Portugal. Financial corporations act in this context as intermediaries between foreign savings and domestic borrowers. The sector-level contributions to an economy's foreign net liabilities vary significantly by country, which implies a need for different adjustment paths. In a currency union, given the absence of a mechanism for transfer payments between member states, there is a heightened risk that large foreign liabilities will become unsustainable. Thus, member states must contain external imbalances, which often reflect a loss of competitiveness and internal imbalances, to prevent the reoccurrence of current vulnerabilities.