'Run on UK' sees foreign investors pull $1 trillion out of the City of London.

[seemslikeadream]

http://www.independent.co.uk/news/business/news/run-on-uk-sees-foreign-investors-pull-1-trillion-out-of-the-city-1639413.html

By Sean O'Grady, Economics correspondent


Saturday, 7 March 2009
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A silent $1 trillion "Run on Britain" by foreign investors was revealed yesterday in the latest statistical releases from the Bank of England. The external liabilities of banks operating in the UK – that is monies held in the UK on behalf of foreign investors – fell by $1 trillion (£700bn) between the spring and the end of 2008, representing a huge loss of funds and of confidence in the City of London.


Some $597.5bn was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5bn haemorrhaged in the second quarter of 2008 – a record. About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion. This is by far the largest withdrawal of foreign funds from the UK in recent decades – about 10 times what might flow out during a "normal" quarter.

The revelation will fuel fears that the UK's reputation as a safe place to hold funds is being fatally comp-romised by the acute crisis in the banking system and a general trend to financial protectionism internat- ionally. This week, Lloyds became the latest bank to approach the Government for more assistance. A deal was agreed last night for the Government to insure about £260bn of assets in return for a stake of up to 75 per cent in the bank. The slide in sterling – it has shed a quarter of its value since mid-2007 – has been both cause and effect of the run on London, seemingly becoming a self-fulfilling phenomenon. The danger is that the heavy depreciation of the pound could become a rout if confidence completely evaporates.

Colin Ellis, an economist at Daiwa Securities, commented: "The outflow of overseas banks' UK holdings is not surprising – indeed foreign investors in general will still be smarting from the sharp fall in the exchange rate last year, as many UK liabilities are priced in sterling terms. That raises the question of what could possibly tempt overseas investors to return to the UK. Further heavy outflows of funds are probably a given."

The Bank of England said that there had been a large fall in deposits from the United States, Switzerland, offshore centres such as Jersey and the Cayman Islands, and from Russia.

Paranoia that the UK could follow Iceland into effective national insolvency and jibes about "Reykjavik on Thames" will find an unwelcome substantiation in these statistics – which also show that stricken British banks are having to repatriate similar sums back to Britain. This is scant consolation for the authorities, however, as it means the UK and sterling are, like some emerging markets and currencies, suffering from a flight of capital. By contrast some financial centres and currencies – notably the US dollar and the Swiss franc – are enjoying a boost as "safe havens" in a troubled world.

[cliffordu]

1. Get ready, kids....

I get the feeling THIS is significant

[BelgianMadCow]

5. While ordinary people still aren't running on the banks

you can BET the really wealthy have done and are doing so. This is just one case illustrated but by no means is it the last.

The Chinese said : US back up Fannie and Freddie or else
Europe said: US better back up AIG (that insured almost all banks in Europe against credit risk!) or else

The US is being liquidated. The creditors are lining up as they do after a bankruptcy. It just hasn't been declared.

[AyanEva]

2. The dollar is a safe haven?!

Interesting...

[cobalt1999]

3. The dollar has been going up in value for months now

And is projected to really increase against other currencies in the months to come.

[BelgianMadCow]

6. yeah - and you know why?

because everyone that holds US paper is saying gimme the money. That raises demand and thus price of dollars, but only because people are opting out of investments in the US.

Dollar a safe haven - well MAYBE against the Pound but no way against other major currencies.

[Tierra_y_Libertad]

4. The dollar is a "safe haven" because China continues to lend us money to prop it up.

http://watchingamerica.com/News/22546/the-us-trade-and-economy-and-its-future-transformation/

The external demand economies have also abetted the said situation by buying the U.S. treasury bonds in large amounts and driving down their own currencies' exchange rates. Many countries, especially China, have been braving the dangers of trade wars and throwing money into the black hole for capitals. This is like a strange situation where the shop owner wants to sell his products off cheaply, yet the customer demands a raise in the price.

The reason for this is that there is much more benefit than loss for China under this institution. The shifting of the world's production to China has driven down the unemployment rates and has brought about the upgrading of corporate technology and management.

[AyanEva]

7. OK I read that article. (thanks btw!)

And I'm going to need you to dumb it down a bit more for me. I still don't understand why exactly the Chinese are buying up so many bonds. :shrug: I get so lost on the financial issues when it becomes more complicated than, "The economy sucks." I'm trying but I'm just having trouble making heads or tails of it. :(

[Tierra_y_Libertad]

8. In simple (perhaps simplistic) terms: The Chinese are smart shoppers.

They are awash in dollars. They've been accumulating them for some time. Now they're going shopping all around the world with those dollars.

Simply put, they can buy more with strong dollars. And, they're buying real stuff. Mineral rights in Africa. Mineral and oil rights in South America. Oil and gas contracts in the Middle East and Russia. Mineral rights in Australia.

All at rock bottom prices because of deflation. When inflation comes back all those things are going to be worth (in monetary and real terms) a lot more than they are now.

In the meantime, the USA and Europe are buying a lot of paper (debt) just to survive.

It pays the Chinese to prop up the dollar with loans in the long run because they will end up very, very, rich when it's all over.

And, we'll still owe them the money.

[JCMach1]

9. Investors freaked out about the pound's loss of value...