EFTA01461073

9 March 2015 Special Report: Euroglut here to stay: trillions of outflows to go (Figure 1 Current account surpluses of 3% are here to stay (Figure 2' Both households and corporations are net savers %el OCP 2 0 -Etalannt=cull $ 2001 2109 2006 2007 2000 2011 2013 !buret Canes OHL WO NM OMNI. 201403 mn MO 1 110 j 120 103 so so 40 20 HairtecOs Finanotis CMR,meM Curren; soccum rein 040.*Stbil Bank 103 Surpluses recycled through record portfolio outflows The large current account surplus combined with ECB easing and negative rates has initiated a process of large-scale capital outflows from Europe. In the second half of 2014. the euro area saw record net investment in foreign portfolio assets, reaching E135bn in Q4 (Figure 3), or around half a trillion in annualized terms. There are no indications that this trend has reversed or slowed down since. More than 90% of these flows are attributable to fixed income, though equity outflows accelerated markedly in December. At the same time, 'other investment' outflows- -mostly bank lending in the European periphery—have diminished relative to the financial account. The expansion of the Eurozone's financial account has thus been driven by portfolio outflows. This stands in stark contrast to the pre-crisis decade, during which the Eurozone recycled its intermittent and meager surpluses through EUR-denominated loans to the European periphery. Portfolio outflows from the euro area have been searching for yield overseas. Relative to the allocation of the EM U's total stock of foreign portfolio assets, recent flows have disproportionately favoured assets in the US, the UK, and Canada (Figure 4). By contrast, the rest of the European Union—Scandinavia and Eastern Europe—have seen disproportionately small outflows as a result of being drawn into the Eurozone's disinflationary spiral. If one plotted outflows against assets at the beginning of the four-quarter period, the new investor bias towards the Anglo-Saxon countries would be even starker. 'Figure 3: Portfolio outflows at record highs On Wert .EuiO4/44 r41 poncho Mon 200 Figure 4 Disproportionate portfolio outflows to US and UK 60% Orniistoe pole° tulles 45% OS 931340 2014. tai leo eh I uS • 35% 1 100 30% 1 sruns 50 25% i 0 20% uk ♦ 15% 10% -1C0 5% • 01we EU Gott por1c0, assets m 03 2014 tto .150 • 2003 2002 2034 2006 2005 2010 2012 2014 0% 10% 20% 30% 35% 40% Skeet Oeutecha Sok ECII Saute Osische Snit. EC° Deutsche Bank AG'London Page 3 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0122894 CONFIDENTIAL SDNY_GM_00269078 EFTA01461073