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Eurozone current account vs. NIIP

string22
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2/9/2016 9:37:45 AM
Posted: 10 months ago
How can the Eurozone run a current account surplus and a negative net international investment position (NIIP) at the same time?
Usually countrys with surpluses have positive NIIP.
ResponsiblyIrresponsible
Posts: 12,398
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2/10/2016 1:26:40 PM
Posted: 10 months ago
At 2/9/2016 9:37:45 AM, string22 wrote:
How can the Eurozone run a current account surplus and a negative net international investment position (NIIP) at the same time?
Usually countrys with surpluses have positive NIIP.

It's the opposite, actually -- a deficit in one usually means a surplus in the other. China, with its twin surplus, is actually a very rare exception.

The current account balance is essentially the trade balance: you can think of it as savings less investment, the implication being--via a user-savings identity that you can derive from the GDP equation (I'd be happy to show you the math, if you're interested)--that savings will either be allocated to investment or to acquiring foreign assets.

The flip side of that is the capital account balance, which consists of net foreign and portfolio investment.

Why are these flipped? Well, you can think of it like this:

Let's say the U.S. is running a capital account surplus. This means that foreigners are buying our bonds because Treasuries are considered extremely safe assets (and the rest of the world is disintegrating, so our interest rates are relatively higher and expected to rise at a faster clip than abroad). To purchase these Treasuries, denominated in dollars, obviously that pushes up on the exchange-rate value of the dollar. As the dollar rises, U.S. exports become more expensive, so foreigners buy less stuff. That pushes down on U.S. net exports which drives the current account balance into the red.

In other words, there's more money coming into the U.S. than going out -- or more foreign investment in the U.S. than there is U.S. investment in foreign countries, meaning on net investment outweighs savings, which is by definition a current account deficit.
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string22
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2/10/2016 1:41:42 PM
Posted: 10 months ago
At 2/10/2016 1:26:40 PM, ResponsiblyIrresponsible wrote:
At 2/9/2016 9:37:45 AM, string22 wrote:
How can the Eurozone run a current account surplus and a negative net international investment position (NIIP) at the same time?
Usually countrys with surpluses have positive NIIP.

It's the opposite, actually -- a deficit in one usually means a surplus in the other. China, with its twin surplus, is actually a very rare exception.

The current account balance is essentially the trade balance: you can think of it as savings less investment, the implication being--via a user-savings identity that you can derive from the GDP equation (I'd be happy to show you the math, if you're interested)--that savings will either be allocated to investment or to acquiring foreign assets.

The flip side of that is the capital account balance, which consists of net foreign and portfolio investment.

Why are these flipped? Well, you can think of it like this:

Let's say the U.S. is running a capital account surplus. This means that foreigners are buying our bonds because Treasuries are considered extremely safe assets (and the rest of the world is disintegrating, so our interest rates are relatively higher and expected to rise at a faster clip than abroad). To purchase these Treasuries, denominated in dollars, obviously that pushes up on the exchange-rate value of the dollar. As the dollar rises, U.S. exports become more expensive, so foreigners buy less stuff. That pushes down on U.S. net exports which drives the current account balance into the red.

In other words, there's more money coming into the U.S. than going out -- or more foreign investment in the U.S. than there is U.S. investment in foreign countries, meaning on net investment outweighs savings, which is by definition a current account deficit.

Are you saying that a current account surplus should generally be associated with a negative net international investment position? Aren't the NIIP and the capital account two separate things? I understand your point that a current account surplus must mean a capital account deficit.

Please see figure 7: http://ftalphaville.ft.com...

One would think that a nation with a current account surplus, which is a net lender of capital to the rest of the world, must therefore net own foreign assets and have a positive net international investment position?

To take your example of the US current account deficit. The US has a negative net international investment position, because as you rightly say foreigners are buying US bonds to fund it and therefore foreigners own more US assets than the US owns of foreigners assets.
ResponsiblyIrresponsible
Posts: 12,398
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2/10/2016 1:57:36 PM
Posted: 10 months ago
At 2/10/2016 1:41:42 PM, string22 wrote:
Are you saying that a current account surplus should generally be associated with a negative net international investment position?

Yes.

Aren't the NIIP and the capital account two separate things?

Well, yeah... separate in the sense that the components are separate: one is the goods and services a country buys/sells to foreigners, and the other is capital inflows. But both are influenced by economic fundamentals, interest rates, the exchange rate, etc., such that they tend to move in opposite directions -- not to mention the savings/investment identity I mentioned earlier, which would suggest that, in principle, a deficit in one means a surplus in the other.

I understand your point that a current account surplus must mean a capital account deficit.

Not *must*, per say, but in most cases. China, for instance, is able to run a deficit in both because it has strict capital controls in place and any financial flows into the country immediately become reserves.

Please see figure 7: http://ftalphaville.ft.com...

That is pretty interesting... sometimes there are revisions and omissions to the accounts -- or, even, massive foreign-currency reserve holdings, or something -- that throw the numbers off. But it seems as though, looking at the underlying theory, that this wouldn't be the case.

One possibility is that we're talking about a mass of countries each of which don't contribute equally to the eurozone's collective current account. For instance, there's a massive savings glut/trade surplus in Germany due to this so-called "internal devaluation" in the early 2000s, and massive trade deficits in the remainder of the periphery. So that's my guess.

One would think that a nation with a current account surplus, which is a net lender of capital to the rest of the world, must therefore net own foreign assets and have a positive net international investment position?

(I should note that I typed the above before thinking this over a bit more, but I wanted to elucidate my thought process on this because I do think this is nevertheless an interesting development.)

Now that I'm thinking about it, we're talking about two completely different things, and we're both right.

I'm talking about financial flows, while you're talking about the overall investment position. If a country, for instance, was a net lender to the rest of the world, there would be more financial flows going out of the country than there would be coming in: in terms of overall financial flows, the country has a "deficit," but nevertheless, because it's holding more foreign assets as you noted, it has a positive investment position.

Yup, I think that explains it...

Sorry for the mix-up.
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string22
Posts: 3
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2/10/2016 2:06:55 PM
Posted: 10 months ago
At 2/10/2016 1:57:36 PM, ResponsiblyIrresponsible wrote:
At 2/10/2016 1:41:42 PM, string22 wrote:
Are you saying that a current account surplus should generally be associated with a negative net international investment position?

Yes.

Aren't the NIIP and the capital account two separate things?

Well, yeah... separate in the sense that the components are separate: one is the goods and services a country buys/sells to foreigners, and the other is capital inflows. But both are influenced by economic fundamentals, interest rates, the exchange rate, etc., such that they tend to move in opposite directions -- not to mention the savings/investment identity I mentioned earlier, which would suggest that, in principle, a deficit in one means a surplus in the other.

I understand your point that a current account surplus must mean a capital account deficit.

Not *must*, per say, but in most cases. China, for instance, is able to run a deficit in both because it has strict capital controls in place and any financial flows into the country immediately become reserves.

Please see figure 7: http://ftalphaville.ft.com...

That is pretty interesting... sometimes there are revisions and omissions to the accounts -- or, even, massive foreign-currency reserve holdings, or something -- that throw the numbers off. But it seems as though, looking at the underlying theory, that this wouldn't be the case.

One possibility is that we're talking about a mass of countries each of which don't contribute equally to the eurozone's collective current account. For instance, there's a massive savings glut/trade surplus in Germany due to this so-called "internal devaluation" in the early 2000s, and massive trade deficits in the remainder of the periphery. So that's my guess.

One would think that a nation with a current account surplus, which is a net lender of capital to the rest of the world, must therefore net own foreign assets and have a positive net international investment position?

(I should note that I typed the above before thinking this over a bit more, but I wanted to elucidate my thought process on this because I do think this is nevertheless an interesting development.)

Now that I'm thinking about it, we're talking about two completely different things, and we're both right.

I'm talking about financial flows, while you're talking about the overall investment position. If a country, for instance, was a net lender to the rest of the world, there would be more financial flows going out of the country than there would be coming in: in terms of overall financial flows, the country has a "deficit," but nevertheless, because it's holding more foreign assets as you noted, it has a positive investment position.

Yup, I think that explains it...

Sorry for the mix-up.

Ok so according to how things should work Eurozone should have a positive NIIP and capital account deficit associated with its current account surplus.

But instead it has a negative NIIP. I'm not sure how this can be?

Can anyone explain the breakdown of it and why it exists? From an accounting perspective and from a practical perspective (the negative NIIP is mainly in periphery: spain, italy etc, but they run C/A surpluses too)