The euro area holds US assets worth approximately €7,000bn (60 percent of GDP) - with almost half portfolio investments (Chart 1). At the end of 2006, that is, before the financial crisis in 2008, European investments in the US totalled €2,600bn, less than 30 percent of GDP. Europe’s current asset position combined with the higher exposure in the US market and possible corrections to the value of US financial assets, has increased the hypothetical risk of large losses for the euro area.
A drop in US financial asset values could occur as the result of a (possibly global) economic downturn and/or the result of a change to the dollar exchange rate. However, in times of high (and global) uncertainty, the US tends to be seen as a relatively safer market and, hence, demand for dollar denominated assets might fall less than demand for assets in other currencies, which would mitigate any depreciation of the US dollar.
Nevertheless, as past experience shows, when the crisis exploded in the US in 2008, European investors experienced a downward adjustment to the value of their investments, with the main driver not the dollar depreciation, but the fall in dollar prices. For example, in December 2008, the S&P 500 index was 38 percent lower than it had been two years earlier and portfolio investments by the euro area fell by 14.5 percent (€212bn) in the same period, reflecting the fall in stock values since the dollar depreciated by only 5.8 percent against the euro (the fall in portfolio investments by the euro area has been more limited than in the S&P 500 index since part of the portfolio holdings included private and sovereign bonds, not only stocks).
The exposure in the US financial market is not spread equally across euro area countries for several reasons, not least the different national financial investment fiscal regimes and the industry and logistics choices of major multinational firms. According to the US Treasury, the euro area holds almost $4,800 billion of US securities (private and public bonds and equities), representing 25 percent of the US securities held by non-residents. More than half of this holding is accounted for by Luxemburg, Ireland and Belgium (respectively eight percent, five percent and four percent); the respective shares held by Germany, France and the Netherlands exceed two percent, while Italy and Spain account for less than one percent each (Chart 2).
The risk related to holding US assets includes the fact that corporate securities represent almost $3,700bn, split almost equally between bonds and equities. This accounts for more than 40 percent of the corporate bond holdings of non-residents and more than 20 percent of the equities held by non-residents. In the former case, Luxemburg and Belgium account for the largest share (respectively 17 percent and 14 percent of US corporate bonds held abroad), followed by Ireland (seven percent).
Overall, the share of US financial assets in the portfolios of euro area countries is not negligible… US securities held by Germany, France and Italy amount to almost 10 percent of their respective national GDP (Chart 3). In the Netherlands, Luxemburg, Belgium and Ireland the share is significantly higher, although the effects on the domestic economy are likely to be mitigated by the fact that these countries act as international financial hubs.
… suggesting that a correction to the US asset prices may be significant for the European economy.
Chart 1 Euro area total assets in US dollars billion euro, end of period (Source: European Central Bank)
Chart 2 US securities held by European countries as share of US securities held by non-US residents (Source: Treasury International Capital System)
Chart 3 US securities held by European countries as share of national GDP (Source: Prometeia’s calculations on Treasury International Capital System and national statistical offices)