Questioni di Economia e Finanza

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1 Quesioni di conomia e Finanza (Occasional Papers) In search of los capial: an esimaion of undeclared porfolio asses by Valeria Pellegrini and nrico Tosi Sepember 2012 Number 131

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3 Quesioni di conomia e Finanza (Occasional papers) In search of los capial: an esimaion of undeclared porfolio asses by Valeria Pellegrini and nrico Tosi Number 131 Sepember 2012

4 The series Occasional Papers presens sudies and documens on issues peraining o he insiuional asks of he Bank of Ialy and he urosysem. The Occasional Papers appear alongside he Working Papers series which are specifically aimed a providing original conribuions o economic research. The Occasional Papers include sudies conduced wihin he Bank of Ialy, someimes in cooperaion wih he urosysem or oher insiuions. The views expressed in he sudies are hose of he auhors and do no involve he responsibiliy of he insiuions o which hey belong. The series is available online a

5 IN SARCH OF LOST CAPITAL: AN STIMATION OF UNCLAR PORTFOLIO ASSTS by Valeria Pellegrini* and nrico Tosi* Absrac The analyses of he inernaional invesmen posiion and balance of paymens saisics sugges ha foreign asses held abroad are grealy underesimaed, in paricular in he secor of porfolio invesmens. The aim of his work is o es his hypohesis and o esimae he magniude of under-repored asses. The approach is based on he comparison of mirror saisics on porfolio asses and liabiliies, mainly using daa coming from he Coordinaed Porfolio Invesmen Survey (CPIS) conduced by he IMF, wih he addiion of informaion derived from several inernaional daabases. For he years from 2001 o 2010 he global discrepancy is esimaed o be equal o 7.3% of world GP on average. ifferen crieria have been adoped o aribue he share of he esimaed under-reporing, paricularly significan in he case of muual funds issued by Luxembourg and he main off-shore cenres, o he main euro area counries. Resuls vary from 6 o 10 per cen of naional GPs. If hese amouns were added o naional daa, saisical consisency in inernaional saisics would improve. JL Classificaion: F32, F21. Keywords: inernaional invesmen posiion, porfolio securiies, under-reporing. Conens 1. Inroducion Channels of capial expor and mehods for assessing capial fligh The illegal expor of capial The lieraure on capial ouflows: a shor summary Global saisics on exernal porfolio asses and liabiliies The main inernaional daa sources and he firs sep owards building our daabase The Coordinaed Porfolio Invesmen Survey (CPIS) Inernaional Invesmen Posiions (IIP) daa published by he IMF The xernal Wealh of Naions (WN II) daabase Merging he hree main daabases (CPIS, IIP and WN II) Furher daa used o increase saisical coverage and o esimae porfolio discrepancies The final daabase and he esimaion of he global discrepancy Under-reporing aribuion and sock posiion adjusmens Mehodological adjusmens in he euro area Inernaional Invesmen Posiion (IIP) and Balance of Paymens (BoP) Crieria of under-reporing aribuion A couner-hypohesis: removing he hypohesis of reliabiliy of porfolio liabiliies Comparison beween IIP and he cumulaed curren accoun Conclusions Bibliography Appendix * Bank of Ialy, conomic Research and Inernaional Relaions.

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7 1. Inroducion 1 The inernaional invesmen posiion (IIP) shows he sock of asses and liabiliies of a counry vis-à-vis he res of he world a a specific dae; he difference (ne posiion) represens he ne foreign claim or liabiliy of a counry. I is a key indicaor of he global imbalances among economies, he degree of inernaional financial inegraion and he vulnerabiliy o exernal shocks. The emergence of large amouns of undeclared asses via ax shields and he analysis of global daa on balance of paymens (BoP) flows and IIP socks sugges ha foreign asses may be sysemaically under-represened, especially in he porfolio 2 componen. The aim of his paper 3 is o assess he exisence of a significan under-reporing of foreign porfolio asses and o esimae is magniude. The saisical collecion sysems on BoP and IIP porfolio securiies were radiionally based on daa provided by residen banks on cross-border paymens and, mos imporanly, on cusomer deposis of foreign securiies; more and more, hey are nowadays based on he direc reporing of residens (banks, firms, insiuional invesors, ec.) abou heir relaionships wih foreign crediors or debors. I is very likely ha asses held abroad by residens, paricularly households, are underrepored, especially when invesors operae hrough non-residen banks or financial insiuions. This is a criical concern for all counries; surveys on households generally do no represen an effecive collecion sysem, since resuls can easily be downward-biased due o boh he scarciy of suiable informaion on wealh disribuion (i.e. idenificaion of high-wealh households) and he deliberae aemp o hide (oally or parially) exernal asses (mainly for ax avoidance and evasion reasons). In Secion 2 he main channels for he illegal expor of capial are briefly described. The analysis of global porfolio exernal saisics (Secion 3), which shows a preponderance of liabiliies over corresponding asses, ends o confirm our houghs. espie he difficuly of collecing reliable daa abou his phenomenon, i is possible o esimae 4 he porfolio asse under-reporing. We propose an approach based primarily on mirror 5 porfolio saisics, using a variey of inernaional official daabases, inegraed wih oher available sources (Secion 4). Our approach is differen from hose proposed in he lieraure and based on he esimaes of misinvoicing rade or capial flighs (very frequenly from developing counries) or focused on he analysis of errors and omissions in BoP saisics. Our mehod compares oal porfolio asses declared by invesor counries and oal porfolio liabiliies declared by debor counries, considering he differences (if exising) beween he wo aggregaes as a proxy for he under-reporing of foreign asses. In oher words, we assume ha daa on exernal liabiliies are more reliable han hose on foreign asses. In Secion 5 we esimae he magniude of he discrepancy beween asses declared by invesor counries and liabiliies repored by issuer counries, broken down by ype of insrumen (equiy or deb securiies) and reference year. The resul is ha he underesimae of global foreign porfolio asses remains seady a beween 7 and 7.5 per cen of global GP in he period from 2001 o 2010 (abou $4.5 rillion a he end of 2010). 1 The auhors wish o hank Gian Maria Milesi-Ferrei for he provision of he xended Wealh of Naions II daabase (WN II). A special hanks o Riccardo e Bonis, Luigi Cannari, Marco Magnani and Robero Tedeschi for helpful suggesions. The auhors are solely responsible for any errors. The views expressed are personal and are no he responsibiliy of he Bank of Ialy. 2 Porfolio invesmens include all invesmens in securiies when hey do no reflec he lasing ineres of he eniy residen in one economy in an eniy residen in anoher economy. They cover ransacions in: a) equiy securiies (below he hreshold of 10 per cen of an enerprise s capial) and shares of muual funds; b) deb securiies, broken down ino money marke insrumens and bonds and noes. 3 I is an updaed and heavily revised version of a previous paper published in Ialian (Pellegrini and Tosi, 2011). 4 In general, capial expored for ax evasion purposes is frequenly deposied in counries ha offer ax advanages or banking secrecy (more han average); moreover, funds are ofen regisered in he name of individuals oher han he acual owner, i.e. figureheads, shell companies or russ locaed in offshore cenres or any oher counries ha offer he possibiliy of hiding he ideniy of he beneficiaries. 5 aa on he same phenomenon derived from saisics produced by counerpar counries. 5

8 In Secion 6 we esimae he share o be allocaed o major euro area counries (France, Germany, Ialy, he Neherlands and Spain); he resuling amouns average around 9 per cen of naional GPs. A less direc bu concepually similar approach is followed by he uropean Cenral Bank, which assesses he under-reporing of asses invesed in muual funds in Ireland and Luxembourg by he residens of oher euro area counries. In Secion 7 we change he assumpion ha only asses are biased, and assume insead ha only half of he discrepancy is due o under-reporing of asses, while he oher half is linked o overevaluaion of exernal liabiliies. In Secion 8 we analyse he relaionship beween ne IIP and he cumulaed curren and capial accoun balance for major euro area counries in order o assess he consisency beween hese aggregaes and, consequenly, he plausibiliy of he hypohesis of asse under-reporing also from his poin of view. Secion 9 offers conclusions and is followed by a bibliography and a mehodological appendix. 2. Channels of capial expor and mehods for assessing capial fligh 2.1 The illegal expor of capial The mehodologies for esimaing he illegal expor of capial which have been proposed in he lieraure are generally relaed o some assumpions abou he ways such expors are carried ou and abou he effecs on he BoP and he IIP of he counries affeced by his phenomenon. Briefly, he hree main ways of exporing capial are as follows. 1) Under-invoicing of expors and over-invoicing of impors of goods, services and inangible asses (misinvoicing rade). Only enerprises are involved in under-invoicing, which consiss of reducing revenues in he domesic economy by ransferring profis o colluding foreign counerpars, generally locaed in counries where i is possible o ge ax advanages. As for he over-invoicing of impors, he same ransfer mechanism is implemened by increasing he coss of he imporing company and, consequenly, he revenues of he exporing foreign counerpar. This channel may also be exploied by households by means of ficiious impors of goods or services. Such mehods of capial expor do no necessarily generae errors and omissions (&Os) 6 in he BoP, as hese operaions may be refleced in boh he curren accoun and he financial accoun of he BoP. 2) Transacions regarding he financial accoun. This caegory includes ransacions (buy or sell) of financial asses (no relaed o a selemen of any curren or capial accoun ransacions); hey are regularly repored a he ime of he firs cross-border ransfer. Funds are hen no longer repored for accouning, ax and saisical purposes; his may happen, for example, by means of ficiious loans o companies ha go bankrup subsequenly, ficiious foreign selemens oward oher foreign counries, and so on. These funds are hen invesed in oher (undeclared) financial insrumens, like porfolio securiies. The influence of hese forms of capial expor on he &Os of he BoP and he IIP depends on he characerisics of he daa collecion sysem used o compile 7 such saisics. 3) Cash ransfers. The archeypal case of undeclared foreign asse creaion is he ransfer of cash across he naional borders (i.e. smugglers crossing he border physically); in any case, no recordings of foreign asses are declared. 8 6 The presence of sysemaic negaive errors and omissions in he balance of paymens is generally associaed wih nonregisered capial expors; see laer. 7 If he IIP is calculaed on he basis of cumulaed ne flows from cross-border selemens repored by banks, i may ake ino accoun he increase in foreign asse socks, even wih a likely misclassificaion of he underlying phenomenon; if he IIP is compiled on he basis of periodically colleced sock daa, hese asses canno be easily capured and recorded. 8 Before he inroducion of he euro, a he ime of he reques for conversion ino foreign currency agains he delivery of (e.g. Ialian) banknoes by foreign banks (usually Swiss ones), a worsening of he exernal posiion of he cenral bank (reducion of foreign currency socks) was recorded. I was no offse by a corresponding creaion of foreign asses; negaive &Os were consequenly recorded. The adopion of he euro has largely reduced (or even cancelled) he relaionship beween capial expors and banknoe remiances. 6

9 2.2 The lieraure on capial ouflows: a shor summary The lieraure abou undeclared asses abroad has in general focused on capial ouflows (capial fligh) 9 from emerging or developing counries on he one hand, and on he disorions in he invoicing of impored/expored goods on he oher hand. The lieraure on capial fligh mainly concerns developing counries. 10 Proposals have been made for alernaive measures o assess he magniude of he phenomenon. 11 Some mehods are based on he analysis of &Os which, if sysemaically and significanly negaive, can be inerpreed as an indicaor of unrecorded capial ouflows (ho money mehods). Alernaive mehods consider capial fligh as being equal o ne inflows of capial (increase in public deb plus incoming foreign direc invesmen) minus ne ouflows of capial (curren accoun defici plus he cenral bank s increase in reserves). Sources of funds (inflows) no mached by visible uses of funds (ouflows) are considered capial fligh (Chang e al, 1997, page 101). This mehodology has been developed in several versions, especially by World Bank economiss, see for example he ooley mehod (ooley, 1996) and he World Bank residual mehod (Claessens, 1997). A differen approach is based on he measuring of rade misinvoicing. From he pioneering works of Bhagwai (1964, 1967) o he review made by Nisch (2009), he under-invoicing of expors and/or over-invoicing of impors has been highlighed as a frequenly used channel for illegal exporing capial. The common denominaor of his approach is o assess he rade misinvoicing magniude by analysing he foreign rade daa mirror in order o deec discrepancies. However, he applicaion of his mehod is problemaic, given he relevan saisical inconsisencies which make i difficul o idenify he real amoun of he phenomenon. In paricular, a leas in he las weny years, he worldwide empirical evidence shows a regular surplus of expors over impors. ifferen reasons, such as VAT frauds, can induce a rade misinvoicing in he opposie direcion, i.e. over-invoicing of expors and/or under-invoicing of impors. Finally, as noed by Bhagwai (1967): Whereas i is easy o esablish he condiions under which he faking of rade values [ ] will occur, i is in pracice exremely difficul o se abou deermining wheher such faking is acually occurring. I is furher impossible o find ou how much faking is going on. Moreover, he over- and under-invoicing of expors for he purposes of capial expor does no necessarily lead o significan asymmeries in world curren accoun balances. 12 The mehod proposed in his paper is differen: we esimae he under-reporing of foreign asses by using porfolio mirror saisics. In deail, we analyse he discrepancies beween porfolio asses and liabiliies a he level of issuer counry and ype of financial insrumen. In oher words, our approach is independen from he specific mode of capial expor; i shifs he focus o he sock of final financial invesmens, which can also be consiued by asses differen from porfolio securiies (i.e. bank deposis), alhough heir amouns are likely o be significanly lower Global saisics on exernal porfolio asses and liabiliies Before examining daa availabiliy and esimaing he (possible) under-reporing of porfolio socks, i is useful o sar wih BoP flows. 9 ifferen definiions have been proposed; one frequenly adoped considers capial fligh as he sudden irregular ouflows from a counry as a consequence of an economic crisis or oher facors which influence he risk of capial losses on domesic asses. 10 Before he complee liberalizaion of capial flows (1990), several papers on capial fligh from Ialy were published, focusing on he aemp o esimae he illegal expors of banknoes, for example Vicarelli (1970), and on he over-invoicing of impors, for example Gandolfo (1977). 11 See, for a review, Schneider (2003) and Chang e al. (1997). 12 In fac, cases involving iner-company or predeermined regular flows imply a consisency in he accouning schemes and, quie probably, in he saisical reporing, oo. Conversely, asymmeries may be generaed in cases involving households or small companies, as he foreign counerpar may no acually exis or could no be included in saisical daa collecion (for example, because of he presence of a reporing hreshold). 13 For Ialy, his is he oucome of an analysis conduced on he basis of available mirror saisics on foreign direc invesmen (public daa) and bank deposis and loans (confidenial daa); see Pellegrini and Tosi (2011). 7

10 When calculaing global saisical discrepancies, he IMF highlighs he preponderance of exernal liabiliies over asses; see Figure 1, based on he ime series of world porfolio flows from 1988 o If all global flows were correcly recorded, he porfolio global ne balance would be equal o zero, apar from moneary gold; insead, he discrepancy is 0.29 per cen of world GP (yearly average). In cumulaive erms, i sums up o abou 6.6 per cen of global GP (or abou $4.184 rillion) a he end of Figure 1 also shows he sum of he world balances of income from porfolio invesmen and oher invesmens. The global ne balance is sysemaically negaive, wih a yearly average discrepancy of 0.30 per cen of world GP. This inconsisency implies ha ineres or dividends paid by debor counries o residens in foreign counries are usually higher han hose declared by invesor counries. Figure 1 Ne (reversed sign) porfolio invesmen discrepancies and porfolio and oher invesmen incomes as a percenage of world GP ( ) WORL PORTFOLIO INVSTMNTS AN INCOMS (ne balances in % of world GP) Porfolio invesmen (sign changed) Porfolio and oher invesmen income % world GP Source: Based on IMF daa. Such disorions may depend on he overesimaion of liabiliies and/or on he underesimaion of asses. In he firs case, he overesimaion of he exernal liabiliies can be due o an erroneous aribuion o foreign invesors of securiies issued by residens and held abroad (and no declared) by residen invesors, quie probably wihou using he naional banking sysem. Obviously, he opposie bias is possible: if exernal liabiliies were globally underesimaed, he discrepancy calculaed on he basis of he mehod proposed in his paper would be an underesimaion of he global discrepancy as well. The second case, ha is, he underesimaion of porfolio asses, seems raher plausible as far as sysemaic under-reporing of asses held abroad is concerned (ouside he residen banking secor). This case may be a major cause of he discrepancies observed beween global asses and liabiliies. Taking ino accoun hese consideraions, he res of his paper is based on he assumpion ha porfolio liabiliies are he reference poin and ha discrepancies beween asses and liabiliies are a good proxy of he underesimaion of exernal porfolio asses. The proposed mehod does no separae he componens due o saisical errors (owing o incomplee coverage and/or lack of accurae porfolio saisics) from hose linked o he volunary under-declaraion of asses held abroad 8

11 (such as he propensiy for holding asses abroad). In Secion 7 a couner-hypohesis is examined; underesimaion of asses and overesimaion of liabiliies are considered equally probable. 4. The main inernaional daa sources and he firs sep owards building our daabase The esimaion of undeclared porfolio asses is made from a global perspecive, analysing he financial relaionships beween counries on he basis of porfolio asses and liabiliies as repored in official inernaional saisics. This informaion mus be inegraed wih oher saisical sources in order o increase he coverage. 4.1 The Coordinaed Porfolio Invesmen Survey (CPIS) The primary source is he IMF Coordinaed Porfolio Invesmen Survey (CPIS): he member counries in 2001 (wih he excepion of China, Saudi Arabia and some oher oil-exporing counries, some offshore cenres) provide his informaion on he sock of porfolio asses by issuing (debor) counry on an annual basis. 14 As par of he CPIS, wo addiional surveys regarding securiies held as official reserve asses and securiies held by inernaional bodies are conduced. 15 The CPIS repors he bilaeral posiions beween invesor and issuing counries; he geographical breakdown by issuing counry allows us o derive daa on liabiliies (derived liabiliies) by counry. As we shall see, derived liabiliies are used boh in case of missing daa and as he erm of comparison wih oal liabiliies, as repored by issuing counries in heir IIP daa. In formal erms, we define: A=asses, L=liabiliies, P=derived liabiliies. Underscrips: i=issuing counry; j=invesor counry, =year (from 2001 o 2010). Overscrips: = equiies, = deb. By aggregaing asses declared by all invesor counries j in a single issuing counry i, we obain he derived liabiliies of counry i in year for a ype of financial insrumen ( or ) as: 1) Pi A e Pi A. j j 4.2 Inernaional Invesmen Posiions (IIP) daa published by he IMF The second benchmark for he comparison is he IIP daa of counries reporing o he IMF, 16 which are published on he basis of he same BPM5 rules. Porfolio socks are broken down by ype of financial insrumen bu no by parner counry (invesor for liabiliies or issuer for asses). In he absence of reporing errors, derived liabiliies from he CPIS should be less han or equal o he liabiliies declared in IIP saisics, if coverage is incomplee. Asse daa have been used in his paper o check oal declared asses in he CPIS. 4.3 The xernal Wealh of Naions (WN II) daabase The xernal Wealh of Naions II (WN II) is a daabase developed by Lane and Milesi- Ferrei. 17 I marks an improvemen on he official daa published by he IMF (CPIS and IIP), as i exends coverage by inegraing oher sources and esimaes. The sock of asses and liabiliies for 145 counries is made available. aa are broken down by major componen of IIP, bu due o he dependence on IIP daa, unlike he CPIS, i provides no informaion on he geographical breakdown. In his work, WN II is used o fill informaion gaps abou counries ha do no publish heir IIP and do no paricipae in he CPIS. 14 Asses are broken down by (a leas) equiy securiies (including shares and invesmen funds) and deb securiies (money marke insrumens and bonds and noes; see foonoe 2). Asses are valued a marke price a he end of he period and daa are compiled on he basis of he mehodology described in he fifh ediion of Balance of Paymens Manual (BPM5). 15 These saisics are published only a an aggregae level as daa are confidenial. 16 IFS saisics, hp://elibrary-daa.imf.org/findaarepors.aspx?d=33061&e= For furher deails, see Lane and Milesi-Ferrei (2001, 2007). 9

12 4.4 Merging he hree main daabases (CPIS, IIP and WN II) Our daabase inegraes he exising one so as o increase coverage as much as possible. The saring poin is he daa on asse socks (wih he breakdown by issuer counry) from he CPIS. 18 These daa have been mached wih he corresponding porfolio liabiliies (wihou he breakdown by invesor counry), 19 using he IIP, CPIS (in his case as derived liabiliies; par. 4.1) and WN II. For each issuing counry i and year we can calculae he difference beween oal liabiliies (available wihou he breakdown by invesor counry) and he sum of he asses ha invesor counries j declare hey are holding in securiies issued by counry i: 2) i, Ui Li A and he global discrepancy on equiy securiies is given by: U Ui j 3) i, Ui Li A and he global discrepancy on deb securiies is given by: j (i j; i,i=1,.,n; =2001,...,2010). If available, official IIP daa are used o deermine liabiliies; secondly, WN II 20 is used. If neiher source provides any reliable informaion, he liabiliies of he issuing counry are assumed o be equal o he derived liabiliies (from he CPIS), namely: 4) Li Pi A and, by definiion, he oal discrepancy for ha counry is zero: U i 0 j U i i 5) Li Pi A and, by definiion, he oal discrepancy for ha counry is zero: U i 0. j I is worhwhile o bear in mind ha our approach (unil Secion 7) is based on he hypohesis of reliabiliy of liabiliies; consequenly, he discrepancies are enirely aribued o under-reporing of asses. The merging of he hree daabase summary saisics repored in Table 1 shows ha liabiliies are sysemaically higher han asses. On average he gap is nearly 18 per cen of declared asses, corresponding o abou 10 per cen of world GP; a end-2010 he discrepancy represens abou 13 per cen of world GP. U i 18 For some counries, namely Bahrain, India, Kuwai, Lavia, Mexico and Pakisan, some missing daa need o be esimaed. 19 Informaion on he economic secor of he invesor has no been aken ino accoun, alhough i is useful o deec economic secors ha are more prone o under-reporing exernal asses (households and firms). Such informaion is no available for some of he major counries. 20 In he Appendix he mehodological noe describes he few cases in which he derived liabiliies (from CPIS) are greaer han he officially declared liabiliies (from he IIP). 10

13 Iniial sage: comparison beween global porfolio asses and liabiliies (in billions of US dollars or percenages) Table quiy securiies 5,455 5,025 7,293 9,140 11,046 14,845 17,968 10,408 14,453 16,346 (A) Asses (official reserves eb securiies 7,627 9,457 12,386 14,975 15,818 19,408 22,788 22,008 24,576 25,723 included) Toal 13,083 14,482 19,679 24,115 26,864 34,253 40,756 32,416 39,029 42,069 (L) Liabiliies quiy securiies 6,846 6,362 9,011 11,193 13,421 17,500 21,375 12,734 17,775 20,228 eb securiies 8,894 10,868 13,962 16,958 18,012 21,839 25,462 25,071 28,749 29,971 Toal 15,740 17,230 22,973 28,151 31,433 39,340 46,837 37,804 46,524 50,198 Global discrepancy quiy securiies -1,391-1,337-1,718-2,053-2,375-2,656-3,407-2,326-3,322-3,882 i U i eb securiies -1,267-1,412-1,576-1,983-2,194-2,431-2,674-3,063-4,172-4,248 Toal -2,658-2,748-3,294-4,036-4,569-5,087-6,081-5,388-7,495-8,130 Global quiy securiies -25.5% -26.6% -23.6% -22.5% -21.5% -17.9% -19.0% -22.3% -23.0% -23.7% discrepancy as a share of eb securiies -16.6% -14.9% -12.7% -13.2% -13.9% -12.5% -11.7% -13.9% -17.0% -16.5% global asses Toal -20.3% -19.0% -16.7% -16.7% -17.0% -14.9% -14.9% -16.6% -19.2% -19.3% Sources: IMF (CPIS and IIP) and WN II. 4.5 Furher daa used o increase saisical coverage and o esimae porfolio discrepancies The second sep in our process of building he daabase consiss of idenifying he criical aspecs as regards daa coverage and availabiliy. The addiion of furher daa sources has allowed us o fill a subsanial share of he gaps, especially on he asses side. In a few cases correcions have been made for boh asses and liabiliies; in he laer case his is a consequence of adjusmens made o eliminae some inconsisencies derived from he comparison of official daa. The work of progressively increasing he level of coverage and he consisency of he daabase has covered he following counries (or groups of counries): he Unied Saes, Japan, Ireland, Germany, China, inernaional organizaions, he Neherlands, Arab oil-exporing counries and major offshore cenres (Cayman Islands, Briish Virgin islands, Guernsey and Jersey). The Appendix conains a deailed descripion of boh he addiions and he correcions made and he addiional daa sources found. In he remaining cases (mainly offshore cenres, e.g. he Neherlands Anilles), where porfolio liabiliies are no available, hey have been assumed o be equal o he corresponding CPIS derived liabiliies. Consequenly, no discrepancy referring o he securiies issued by hese counries can be shown in our daa by consrucion; he esimaed global discrepancy can herefore be considered as a lower bound. 5. The final daabase and he esimaion of he global discrepancy In Table 2 we show he saisical source (in value) of porfolio liabiliies and asses, broken down by insrumen. As for liabiliies, he main source is he IIP, even if he CPIS derived liabiliies play a significan role; he WN II is of lile imporance. As regards asses, he CPIS is he mos imporan source. 11

14 Table 2 Final sage: global porfolio sock asses and liabiliies broken down by saisical source (in billions of US dollars) LIABILITIS quiy securiies eb securiies quiy securiies eb securiies CPIS derived ,039 1,722 2,925 3,664 2,636 3,008 2,316 4,110 WN II , IIP 5,135 5,414 7,620 8,900 9,289 12,117 16,147 8,841 13,508 13,860 Our esimae ,209 2,054 2,876 3,766 2,606 2,523 2,739 Toal 7,226 6,802 9,657 12,066 14,544 19,110 23,723 14,634 19,059 21,630 CPIS derived 1,728 2,017 3,119 4,857 2,269 4,445 3,526 2,667 3,004 2,781 WN II IIP 5,822 7,174 9,300 10,394 14,094 15,657 20,609 21,156 23,030 24,066 Our esimae 1,148 1,503 1,511 1,706 1,641 1,911 2,184 2,202 2,467 2,613 Toal 8,997 11,022 14,291 17,345 18,378 22,407 26,752 26,444 29,044 30,290 ASSTS CPIS derived 5,318 4,894 7,112 8,902 10,822 14,216 17,122 9,820 13,687 15,302 WN II IIP Our esimae ,038 1,278 1,890 2,563 1,880 1,950 2,198 Toal 5,986 5,610 8,160 10,266 12,490 16,608 20,391 12,162 16,284 18,255 CPIS derived 7,443 9,200 12,207 14,724 15,413 18,846 22,092 21,237 23,815 24,945 WN II IIP Our esimae ,102 1,419 2,035 2,762 2,898 3,130 3,583 Toal 7,971 9,878 13,146 16,091 17,202 21,308 25,391 24,702 27,544 29,196 Sources: IMF (CPIS and IIP), WN II, naional sources. In Table 3 we summarize he resuls. The difference beween asses and liabiliies is sill large hough lower han he one repored in Table 1 and on average equal o 11.7 per cen of oal asses in he period. The discrepancy in deb securiies decreases significanly (a end-2010 i is jus one quarer of he iniial one) and shows a downward rend, while ha regarding equiy securiies in which he influence of cerain offshore and financial cenres is paricularly imporan remains high (a end-2010 i is 87 per cen of he iniial one) and shows an upward rend excep in 2008, due o he fall in equiy marke prices relaed o he financial crisis. In 2010 he global discrepancy amouns o $4.469 rillion (equal o 7.1 per cen of world GP), quie similar o ha derived from cumulaed global BoP flows ($4.184 rillion; Secion 3). 21 The effec on world GP seems o be quie sable, generally beween 7 and 7.5 per cen. 21 Our resuls are close o hose obained by Zucman (2012) on he basis of a mehodology which also used mirror saisics and was carried ou independenly of our analysis. 12

15 Asses Liabiliies Global discrepancy Table 3 Final sage: porfolio sock and global discrepancy beween asses and liabiliies (in billions of US dollars or percenages) quiy securiies 5,986 5,610 8,160 10,266 12,490 16,608 20,391 12,162 16,284 18,255 eb securiies 7,971 9,878 13,146 16,091 17,202 21,308 25,391 24,702 27,544 29,196 Toal 13,957 15,489 21,306 26,357 29,692 37,916 45,782 36,864 43,828 47,451 quiy securiies 7,226 6,802 9,657 12,066 14,544 19,110 23,723 14,634 19,059 21,630 eb securiies 8,997 11,022 14,291 17,345 18,378 22,407 26,752 26,444 29,044 30,290 Toal 16,223 17,825 23,948 29,411 32,922 41,517 50,475 41,077 48,103 51,920 quiy securiies 1,239 1,192 1,497 1,800 2,053 2,503 3,332 2,471 2,776 3,376 eb securiies 1,026 1,144 1,146 1,254 1,177 1,099 1,361 1,742 1,500 1,093 Toal 2,266 2,336 2,643 3,054 3,230 3,602 4,693 4,213 4,275 4,469 Global quiy securiies 20.7% 21.2% 18.3% 17.5% 16.4% 15.1% 16.3% 20.3% 17.0% 18.5% discrepancy as share of eb securiies 12.9% 11.6% 8.7% 7.8% 6.8% 5.2% 5.4% 7.1% 5.4% 3.7% asses Toal 16.2% 15.1% 12.4% 11.6% 10.9% 9.5% 10.3% 11.4% 9.8% 9.4% Global quiy securiies 3.9% 3.6% 4.0% 4.3% 4.5% 5.1% 6.0% 4.0% 4.8% 5.4% discrepancy as share of eb securiies 3.2% 3.4% 3.1% 3.0% 2.6% 2.2% 2.4% 2.8% 2.6% 1.7% world GP Toal 7.1% 7.0% 7.1% 7.3% 7.1% 7.3% 8.4% 6.9% 7.4% 7.1% Sources: IMF (CPIS and IIP), WN II, naional sources. In our approach he idenificaion of discrepancies for each single issuer counry is quie reliable: Table 4 repors he firs nine differences by issuing counry by insrumen. As for equiy securiies, which includes invesmen fund shares, he op six issuing counries (Cayman Islands, Luxembourg, he Unied Saes, Ireland, Guernsey and Jersey) generae abou 75 per cen of he global discrepancy on average in he period from 2001 o The relevance of hese discrepancies is consisen wih he role played by almos all of hese counries, as hey are frequenly he locaion of invesmen funds and end o arac capial from foreign invesors. While he shares of global discrepancy relaed o developed counries appear o be erraic in some cases (e.g. he Neherlands), he shares relaed o financial cenres seem o be more sable. The observed rends suppor he hypohesis of discrepancy due o deliberae under-reporing of asses raher han saisical errors. As for deb securiies, he global discrepancy is less concenraed; he op six issuing counries he Unied Saes, France, Japan, he Neherlands, Ialy and Ausralia sum up o an average effec of abou 60 per cen of he global difference beween liabiliies and asses: all of hem are developed counries and heir significance in he global discrepancy is consisen wih heir role as issuer of deb securiies (mainly public secor bonds). A higher volailiy characerizes he discrepancies relaed o deb securiies; in any case, for some counries France, Ausralia and Ausria he share is fairly sable. The las column of Table 4 shows he effec of discrepancy on a counry s own liabiliies (declared or esimaed). specially for equiy securiies, as is o be expeced, he impac is much smaller for developed counries (he Unied Saes, Swizerland, he Neherlands and Ireland) han for offshore cenres (Cayman Islands, Jersey, Guernsey and he Briish Virgin Islands) and financial cenres (such as Luxembourg), which is generally around 50 per cen; i seems ha he higher he indicaor, he higher he propensiy of a counry o ac as a ax haven. As for deb securiies, he effec is always less han 15 per cen. 13

16 Major porfolio discrepancies by issuing counry (in billions of US dollars) Table QUITY SCURITIS Average share in global discrepancy Average share in counry's liabiliies Cayman Islands % 47.9% Luxembourg % 30.5% Unied Saes % 10.8% Ireland % 12.5% Guernsey % 58.8% Jersey % 55.9% Neherlands % 15.4% Briish Virgin Isl % 46.5% Swizerland % 10.7% Oher counries % - Toal 1, , , , , , , , , , % 15.0% BT SCURITIS Unied Saes % 5.7% France % 11.8% Japan % 14.6% Neherlands % 5.4% Ausralia % 14.7% Ialy % 5.4% Unied Kingdom % 3.7% Ausria % 13.2% Spain % 5.2% Oher counries % - Toal 1, , , , , , , , , , % 6.1% Sources: IMF (CPIS and IIP), WN II, naional sources. 6. Under-reporing aribuion and sock posiion adjusmens Once individual (issuer) counry non-repored liabiliies are calculaed, he final sep is o assign a share of each counry discrepancy o invesing counries. How o calculae he share is he essence of his esimaion. We sar wih he seldom seen cases in which similar adjusmens have been proposed in he saisical pracice. 6.1 Mehodological adjusmens in he euro area inernaional invesmen posiion (IIP) and balance of paymens (BoP) Recenly, he uropean Cenral Bank (CB) addressed he underesimaion of asse flows and socks in he compilaion of euro area BoP and IIP saisics. The aggregaion of BoP naional daa by he CB o obain euro area BoP led o high level of errors and omissions; following an in-deph analysis carried ou wih he help of expers and IIP and BoP compilers of member counries, a cause was idenified in he underesimaion of asses held in Luxembourgish and Irish invesmen funds by euro area residens. The mehodology applied was idenical o ours: a comparison beween he porfolio invesmen liabiliies of each euro area counry and he respecive asses held by residens abroad, using daa from he IMF Coordinaed Porfolio 14

17 Invesmen Survey, revealed ha euro area residens holdings of equiy securiies issued in Luxembourg and Ireland (by invesmen funds) were underesimaed. This seemed o be relaed o he under-reporing of euro area households holdings of invesmen fund shares (CB, 2009b, page 104). In order o reduce asymmeries and errors and omissions, he CB has adoped a mehodology which, besides adjusmens regarding oher BoP iems, consiss in reducing equiy porfolio liabiliies vis-à-vis counries ouside he euro area; over he period saring from mid-2004 and ending in he second half of 2009, he correcion in erms of cumulaed flows amouned o roughly 217 billion (CB, 2009a), corresponding o 2.4 per cen of euro area GP (2009). The correcion on cumulaed flow daa was refleced in a corresponding adjusmen in IIP socks. ue o he residual mehod, 22 he reducion of liabiliies o non-residens implies an increase in asses of euro area residens in Luxembourgish and Irish funds. 6.2 Crieria of under-reporing aribuion ach counry-unallocaed liabiliies are aribued in proporion o he share by he invesing counry in he allocaed liabiliies, as declared in he CPIS daa. Such a share is calculaed for each combinaion of issuer counry, ype of financial insrumen (equiy and deb) and reference year. In general, we define he under-reporing o be aribued o an invesor counry j in he year as follows: ( U K U i K U i ) ( 0 K 1 ; i j; i,j=1,.,n; =2001,...,2010). j i i On he basis of he mirror daa (CPIS) crierion, he shares K and K are calculaed as follows: C1) i, A A K and K A A for j CPIS. j j This approach uses all he deailed informaion provided by he CPIS: in oher words, he basic hypohesis is ha under-reporing should be proporional o he amouns repored officially by invesor counries. This crierion akes ino accoun he level of foreign porfolio asses (and hus i properly weighs he financial openness of he invesor counry), as well as he preference of each invesor counry for a specific combinaion of issuer counry/financial insrumen. Accordingly, i aribues a higher propensiy o under-repor porfolio asses o he major invesors in securiies issued by counries for which high discrepancies beween declared and derived liabiliies are observed (Luxembourg, he Cayman Islands, ec.). As a consequence, no under-reporing is aribued o he counries (e.g. China and Arab oil exporers) which do no paricipae in he CPIS. As a robusness es, we compare his esimae wih he one ha is obained simply by dividing he world discrepancy wih he counry share of world GP, an economic variable available for almos all counries. Formally, we have: C2) i, GP j K K (r,i=1,.,n; =2001,...,2010). GP r This crierion concenraes he allocaion of undeclared asses according o he size of real economic aciviies raher han he relevance of financial invesmens. Moreover, i does no ake ino r 22 uro area liabiliies are calculaed by he CB as he difference beween he sum of liabiliies vis-à-vis he res of he world (inside and ouside he area) declared by each euro area counry and he sum of asses held by hem in oher euro area counries. 15

18 accoun differences across counries in erms of saving propensiy, level of financial openness and preference in erms of issuing counry/insrumen. Table 5 shows he resuls of he aribuion, on he basis of he proposed crieria, of he global under-reporing o five major uropean counries: Ialy, Germany, France, he Neherlands and Spain. As a whole, hese counries would be aribued abou 24 per cen of he global under-reporing, when adoping he CPIS crierion (C1), or abou 17 per cen when using he GP crierion (C2). This difference is due o he prominen role in erms of financial asses played by hese counries wih respec o heir shares of world GP, paricularly in he case of he Neherlands. In order o measure he impac of a possible adjusmen in he IIP porfolio asses of his group of counries, we need o consider is influence on he declared exernal asse socks. As a whole, here would be on average an increase of abou 17 per cen in equiy securiies and 5 per cen in deb securiies: Germany would regiser he greaes adjusmen (abou 31 per cen for equiies and 9 per cen for deb). The adjusmen in he IIP porfolio asses in erms of naional GP would be on average abou 11 percenage poins when applying he CPIS crierion (C1) and abou 8 percenage poins when adoping he GP crierion (C2): he Neherlands would regiser he greaes impac (14 per cen on average). 16

19 Table 5 Under-reporing aribued o five major uropean counries (in billions of euros or percenages) 1s crierion: mirror daa (CPIS) 2nd crierion: share of world GP 1s crierion: mirror daa (CPIS) 2nd crierion: share of world GP 1s crierion: mirror daa (CPIS) ITALY quiy securiies eb securiies Toal % of global official asses 12.7% 12.6% 11.1% 10.0% 10.2% 10.0% 10.1% 10.0% 9.2% 9.0% quiy securiies eb securiies Toal % of global official asses 7.5% 7.6% 7.1% 7.3% 7.0% 6.6% 7.9% 9.3% 7.7% 7.0% GRMANY quiy securiies eb securiies Toal % of global official asses 21.3% 20.5% 18.7% 16.4% 16.9% 13.3% 14.4% 18.0% 15.6% 14.7% quiy securiies eb securiies Toal % of global official asses 14.4% 13.8% 13.1% 12.5% 11.7% 10.3% 11.8% 13.0% 10.8% 10.2% FRANC quiy securiies eb securiies Toal % of global official asses 6.2% 5.5% 4.9% 4.9% 4.7% 5.0% 6.1% 6.6% 4.8% 5.1% 2nd crierion: share of world GP 1s crierion: mirror daa (CPIS) 2nd crierion: share of world GP 1s crierion: mirror daa (CPIS) 2nd crierion: share of world GP quiy securiies eb securiies Toal % of global official asses 7.0% 5.8% 4.9% 4.5% 4.4% 3.7% 4.1% 4.3% 3.7% 3.6% TH NTHRLANS quiy securiies eb securiies Toal % of global official asses 9.0% 7.6% 6.2% 5.2% 5.0% 4.2% 5.0% 6.9% 6.1% 6.3% quiy securiies eb securiies Toal % of global official asses 3.1% 2.9% 2.3% 2.1% 2.1% 2.1% 2.3% 2.7% 2.2% 2.1% SPAIN quiy securiies eb securiies Toal % of global official asses 6.3% 5.2% 4.5% 5.0% 5.3% 4.7% 4.9% 5.4% 5.2% 5.6% quiy securiies eb securiies Toal % of global official asses 13.1% 9.4% 7.8% 7.7% 7.5% 7.4% 9.0% 10.2% 9.5% 11.3% Sources: IMF (CPIS and IIP), WN II, naional sources. 17

20 7. A couner-hypohesis: removing he hypohesis of reliabiliy of porfolio liabiliies I is likely ha asse under-reporing is more common han liabiliy overesimaion. However, in his secion we examine he consequences of assuming his inermediae hypohesis for he above five uropean counries. We make he assumpion ha he wo ypes of error are equally probable, hus aribuing one-half of he discrepancy o he overesimaion of he oal liabiliies and consequenly reducing he declared porfolio liabiliies and reaing he remaining half as he under-reporing of asses of he invesor counries, accordingly increasing he declared porfolio asses of he invesor. Formally, he esimaed under-reporing for he invesor counry is in his case equal o one half of he amoun previously calculaed, for example, wih he crierion based on he use of he CPIS daa (C1): 6a) K 2 A j A and The remaining half of he discrepancy should be reaed as a reducion of he liabiliies for he debor counry. The reducion of he declared liabiliy can be expressed for equiy and deb porfolio liabiliies, respecively, as follows: 6b) j L i A 2 and j L i A 2 Table 6 shows he esimaion of he wo componens by major uropean counries, broken down by ype of financial insrumen and reference year. This hypohesis has a differen impac on porfolio ne posiions of he five counries, due o heir differen behaviour as issuer and invesor. The reducion of liabiliies is quie significan for some counries and i can hardly be explained by a possible under-reporing of securiies issued by residens and held abroad by oher residens, which would erroneously inflae he liabiliies aribued o foreign invesors. The over-reporing of liabiliies can be expeced o be mainly due o pure saisical errors. For France, he overall improvemen of he porfolio ne IIP would be 81 percen of he one resuling from he hypohesis of under-reporing of asses (CPIS crierion). For Ialy, he percenage is lower (64 per cen); for Germany, i would be 54 per cen, as for his counry repored liabiliies end o be more like he derived ones. However, for Spain he couner-hypohesis implies a greaer impac on porfolio ne IIP in he case of CPIS crierion (150 per cen); he opposie is rue for he Neherlands (86 per cen). In conclusion, alhough he adopion of his couner-hypohesis generally diminishes he magniude of he adjusmen of he ne porfolio IIP for he seleced counries, such a correcion is sill significan. K 2 A j A 18

21 Table 6 Couner-hypohesis: half of he discrepancy aribued o he under-reporing of asses (CPIS crierion) and half aribued o he over-reporing of liabiliies (in billions of euros) ITALY More asses quiy Less liabiliies Toal More asses eb Less liabiliies Toal Toal adjusmen GRMANY More asses quiy Less liabiliies Toal eb More asses Less liabiliies Toal Toal adjusmen FRANC More asses Less liabiliies quiy Toal More asses Less liabiliies eb Toal Toal adjusmen TH NTHRLANS More asses Less liabiliies quiy Toal More asses Less liabiliies eb Toal Toal adjusmen SPAIN More asses Less liabiliies quiy Toal More asses Less liabiliies eb Toal Toal adjusmen Sources: IMF (CPIS and IIP), WN II, naional sources. 19

22 8. Comparison beween IIP and he cumulaed curren accoun Given he allocaion of he global porfolio under-reporing, we analyse he consisency of he resuls in erms of adjusmens o he IIP due o undeclared porfolio asses wih he naional BP and IIP saisics. In oher words, we compare he daa on he ne posiion of a counry wih boh is cumulaed curren and capial accoun 23 balance and is cumulaed financial accoun balance (wih reversed sign). We know ha, in he heoreical case where errors and omissions in he balance of paymens are equal o zero, he relaion beween balance of paymen iems can be expressed as follows: curren and capial accoun balance = financial accoun balance (wih reversed sign). Consequenly, apar from valuaion adjusmens, he cumulaed curren and capial accoun should herefore be closely racking he ne IIP. For mos of he major euro area counries, we may assume ha in he long run valuaion adjusmens o asses and liabiliies grow on average a a similar pace and consequenly hey would roughly offse each oher, so ha in Figure 2 we jus cumulae he annual flows. Figure 2 Ne IIP (end-2010) and cumulaed (since 1975) balances of curren and capial accoun and financial accoun (reversed sign) as a percenage of naional GP Ne IIP Cumulaed curren and capial accoun Cumulaed financial accoun Ausria France Germany Ialy Neherlands Finland Porugal Spain Sources: WN II, urosa. Figure 2 shows daa in percenage of naional GP: 24 inconsisencies beween BoP and IIP are quie widespread. The figure repors he ne IIP a he end of 2010 and he cumulaed balance since 1975 of boh curren plus capial accoun and he financial accoun; he difference beween he wo cumulaed balances is he amoun of cumulaed errors and omissions. 23 aa on he capial accoun balance are no available for all counries as from 1975, bu his should have a negligible impac. 24 aa have been derived from xernal Wealh of Naions WN II (Lane and Milesi-Ferrei), ecember 2011 release. 20

23 All counries have an official ne IIP worse (or slighly worse) han wha would be warraned on he basis of he sequence of curren and capial accoun balances. In some cases i is unlikely ha valuaion adjusmens may explain hese differences. This discrepancy leads again o he dilemma abou he overesimaion of liabiliies versus underesimaion of asses. In he case of Ialy, he resuls of he qualiy and consisency analysis and he oucomes of he conrol on mirror daa made on BoP and IIP aggregaes do no seem o reveal he presence of very relevan biases in he curren accoun ime series or in IIP componens oher han porfolio socks. Furhermore, a significan amoun of negaive cumulaed error and omissions (which may be relaed o undeclared asses abroad) can be observed for he Ialian BoP ime series. Accordingly, we may conclude ha he upward revision on porfolio ne IIP would improve he consisency beween BoP and IIP aggregaes for Ialy. In order o assess if hese upward revisions migh be meaningful also for he oher euro area counries, a more in-deph analysis of naional IIP and BP saisics is required. We can observe ha, similar o Ialy, a group of counries (Ausria, Finland, he Neherlands and Spain) show negaive cumulaed errors and omissions, which is consisen wih he hypohesis of exernal undeclared porfolio asses. Germany and Porugal show posiive cumulaed errors and omissions, bu heir ne IIPs are in any case worse han heir cumulaed curren and capial accouns. The difference unexplained by errors and omissions may depend on valuaion adjusmens or on unreconciled BoP and IIP ime series, for example when BoP and IIP saisics derive from differen daa sources and/or are no backward revised. 25 Figure 3 shows he resuls of a es o check wheher he hree proposed adjusmens (underrepored asses esimaed on, respecively, CPIS and GP crieria, plus he couner-hypohesis) on porfolio socks are able o reduce for he major counries of he euro area he difference beween he cumulaed curren and capial accouns and he official ne IIP. Figure 3 ffecs of adjusmens of porfolio socks on he difference beween cumulaed balances of curren and capial accoun (from 1975) and ne IIP (end-2010) (percenage of naional GP) A=Cumulaed curren and capial accoun less official ne IIP A + under-repored asses (CPIS crierion) A + under-repored asses (GP crierion) A + adjused asses and liabiliies (couner-hypohesis) France Germany Ialy Neherlands Spain Sources: WN II, urosa. 25 For he auhors i is clearly more difficul o obain and correcly inerpre his kind of informaion relaed o foreign counries. 21

24 For hese counries he esimaed adjusmens improve he overall consisency beween BoP and IIP saisics. In fac, he more he differences beween cumulaed curren and capial accoun and adjused ne IIP are close o zero, he more appropriae he proposed adjusmens o porfolio sock daa seem o be. For France and Germany, he alernaive crierion of he couner-hypohesis seems o provide he bes resuls; for Ialy and he Neherlands, he mehod based on unrepored asses esimaed by he CPIS maximizes he reducion of discrepancies. For Spain, he adjusmen based on unrepored asses esimaed by GP crierion seems o be he bes approach. In he case of Ialy, we have aken ino accoun he capial repariaion due o a ax shield in place beween he end of 2009 and he beginning of 2010, which disclosed a significan amoun of undeclared foreign asses, nearly 105 billion, 26 of which abou 60 billion were esimaed o be porfolio securiies (corresponding o nearly 4 per cen of GP). The adjusmens have been consisenly reduced in order o ake ino accoun he fac ha a porion of he capial held abroad has already been included in he official Ialian BoP and IIP saisics afer he disclosure. In conclusion, he hypohesis of undeclared foreign asses seems o be consisen wih he prevailing paerns of he observed discrepancies beween IIP and BoP aggregaes, a leas for he main euro area counries. For he Unied Kingdom and he Unied Saes 27, however, he cumulaed curren and capial accouns would indicae a ne posiion significanly worse han he official one. Generally, he approach based on he use of mirror saisics (CPIS) may appear more promising han he GP crierion, while he hypohesis of parial over-esimaion of exernal liabiliies canno be excluded. 9. Conclusions The analysis of balance of paymens and inernaional invesmen posiion porfolio saisics shows a sysemaic preponderance of liabiliies over corresponding asses. I is likely ha a significan par of his discrepancy is relaed o undeclared asses held abroad by non-residen financial insiuions. In fac, as he residen banking sysem is generally obliged o repor daa for saisical and fiscal purposes, foreign asses held by domesic inermediaries are capured by daa collecion sysems. In paricular, he resuls observed during he las decade concerning he ax shields used o repariae o Ialy undeclared capial held abroad ends o reinforce he hypohesis ha under-reporing of porfolio asse securiies could be significan; he possible scale of his under-reporing has recenly led some major uropean counries o conclude agreemens wih he Swiss auhoriies on he axing of capial held by heir residens in Swiss financial insiuions. In his paper we esimaed a plausible order of magniude for his phenomenon. The innovaive elemen is he aemp o quanify he under-reporing of porfolio asses by analysing he discrepancy beween porfolio socks of liabiliies and asses on he basis of mirror saisics, primarily using daa derived from he Coordinaed Porfolio Invesmen Survey (CPIS) conduced by he IMF and from inernaional invesmen posiion (IIP) saisics, and secondly using oher available sources in order o obain an as-good-as-possible saisical coverage. The analysis akes ino accoun all mehods of capial expor. 26 hp:// 27 In he case of he Unied Saes, several papers ry o explain his phenomenon (frequenly called he exorbian privilege ); for example, ichengreen (2011), Habib (2010) and Lane and Milesi-Ferrei (2009). According o Habib (2010), one hird of his excess reurn is accouned for by a posiive yield differenial from invesmen income and wo hirds by capial gains. A leas as regards yields from he invesmen income, oher major issuers of inernaional currencies, such as Japan and Swizerland, enjoy posiive differenial reurns almos similar o hose of he Unied Saes. The euro area however does no enjoy a yield privilege similar o oher issuers of inernaional currencies (page 31). Lane and Milesi- Ferrei (2009) focus heir aenion on residual adjusmens (i.e. unrecorded financial flows, mis-measured sock posiions, or mis-measured capial gains): a good proporion of he residual adjusmen could well reflec unrecorded financial flows, especially in he porfolio caegory (page 197). 22

25 In he period from 2001 o 2010 he posiive gap beween global liabiliies and asses is on average equal o 7.3 per cen of world GP; his amoun is consisen wih he discrepancy in he global cumulaed balance of paymens porfolio flows, which show a sysemaic preponderance of exernal liabiliies over asses. The under-reporing of shares in invesmen funds locaed in Luxembourg and in some offshore counries (above all he Cayman Islands) is paricularly imporan, as migh be expeced. As for deb insrumens, he discrepancy is significanly lower, less concenraed and relaed o securiies issued by advanced counries. Saring from he esimaed global under-reporing of invesors, broken down by issuer counry, reference year and ype of financial insrumen (equiy and deb securiies), on he basis of differen allocaion crieria we calculae he shares o be aribued o major euro area counries as invesors. A he end of 2010 he average values of undeclared asses aribued o Germany and France are beween 9 and 10 per cen of heir naional GP; for Spain we esimae nearly 6 per cen of naional GP, while for he Neherlands abou 16 per cen, as a consequence of is lower weigh in erms of GP and greaer occurrence in erms of exernal financial asses. For Ialy he esimae would be on average beween 9 and 10 per cen (similar o France and Germany), bu i should be adjused downwards in order o ake ino accoun he capial repariaion linked o he ax shield in force beween he las monhs of 2009 and he firs monhs of We have also examined he alernaive hypohesis in which observed discrepancies are parly due o asse under-reporing and parly due o an overesimaion of liabiliies. The overall effec of ne IIP is on average lower bu sill significan, albei wih differen effecs from counry o counry. In general, for he main euro area counries he analysis of he consisency beween IIP saisics and cumulaed curren accoun balances confirms ha ne IIP ends o be worse han i should be; such a conclusion corroboraes he hypohesis of foreign asse under-reporing. Furhermore, he esimaed adjusmens we have proposed are generally able o reduce he discrepancy beween he ne IIP and he cumulaed curren and capial accouns and, consequenly, o improve he overall saisical consisency. Looking ahead, imporan improvemens regarding he accuracy of he esimaion of asse under-reporing and is disribuion by issuer counry and by financial insrumen will be possible; he exension of he main daabase used in his work - he CPIS - from he poin of view of boh he number of paricipaing counries and he available breakdowns (e.g. secor of he invesor), will subsanially improve he reliabiliy of he esimaes. 23

26 Bibliography Baker, R. W. (2005), Capialism s Achilles Heel, John Wiley and Sons, New Jersey (US). Bank of Ialy (2008), Household wealh in Ialy, proceedings of he Conference, Perugia, Ocober 2007, Berau, C., Griever, W. e R. Tryon (2006), Undersanding U.S. Cross-Border Securiies aa, hp:// Federal Reserve Bullein. Bhagwai, J.N. (1964), On he Under-Invoicing of Impors, Bullein of he Oxford Universiy, Insiue of conomics and Saisics, 26, pp Bhagwai, J.N. (1967), Fiscal policies, he Faking of Foreign Trade eclaraions and he Balance of Paymens, Bullein of he Oxford Universiy, Insiue of conomics and Saisics, 29, pp Cayman Islands Moneary Auhoriy (2009), Invesmen Saisical iges, years 2007, 2008 and 2009, available a: hp:// Chang, P.H.K., Claessens, S. e Cumby, R.. (2001), Concepual and Mehodological Issues in he Measuremen of Capial Fligh, Inernaional Journal of Finance and conomics, Vol. 2, pp Claessens, S. (1997), simaes of capial fligh and is behavior, Revisa de Analisis conomico, Vol. 12, No. 1, pp avies, J.B., Sandsröm, S., Shorrocks, A.F. e.n. Wolff (2010), The level and disribuion of global household wealh, conomic Journal, oi: /j Gandolfo, G. (1977), sporazioni clandesine di capiali e sovrafaurazione delle imporazioni, in Rassegna economica, No. 6, November-ecember. Guernsey Financial Services Commission, Invesmen Saisics, various issues available a: hp:// and Forms/. CB (2002), Final repor of Task Force on Porfolio Invesmen Collecion Sysems. CB (2008), The impac of sovereign wealh funds on global financial markes, Occasional Papers, No. 91, July. CB (2009a), Mehodological changes in he compilaion of he euro area balance of paymens and inernaional invesmen posiion (as of November 2009), 2 November. hp:// CB (2009b), Monhly Bullein, ecember. CB (2010), Monhly Bullein, May. ichengreen, B.J. (2011), xorbian privilege: he rise and fall of he dollar and he fuure of he Inernaional Moneary Sysem, New York, Oxford Universiy Press uropean Commission (1998), Communicaions of he Commission on undeclared work, Brussels, COM(98) 219. Feleigh, A. and Moni, P. (2008), How o inerpre he CPIS daa on he disribuion of foreign porfolio asses in he presence of sizeable cross-border posiions in muual funds. vidence from Ialy and he main euro-area counries, Bank of Ialy, Occasional Papers No. 16, Augus. Habib, M. M. (2009) xcess Reurns on Ne Foreign Asses: The xorbian Privilege from a Global Perspecive, hp:// IMF (2002), Coordinaed Porfolio Invesmen Survey Guide, 2 nd diion. IMF (2008), Balance of Paymens and Inernaional Invesmen Posiion Manual, hp:// 24

27 Jersey Financial Services Commission, Summary of saisical daa provided o he Inernaional Moneary Fund s informaion framework, various issues available a: hp:// Kubelec, C. e Sá, F. (2010), The geographical composiion of naional exernal balances shees: , Bank of ngland, Working Paper No. 384, March. Lane, P. R. and Milesi-Ferrei, G.M. (2001), The xernal Wealh of Naions: Measures of Foreign Asses and Liabiliies for Indusrial and eveloping Counries, Journal of Inernaional conomics, Vol. 55, pp , November. Lane, P.R. and Milesi-Ferrei, G.M. (2007), The xernal Wealh of Naions Mark II, Journal of Inernaional conomics, 73, No. 2 (November), pp Lane, P.R. and Milesi-Ferrei, G.M. (2008), Inernaional invesmen paerns, The Review of conomics and Saisics, 90(3), pp Lane, P.R. and Milesi-Ferrei, G.M. (2009), Where id All he Borrowing Go? A Forensic Analysis of he U.S. xernal Posiion, Journal of he Japanese and he Inernaional conomies, 23, Lane, P.R. and Milesi-Ferrei, G.M. (2010), Cross-Border Invesmen in Small Inernaional Financial Ceners, IMF Working Papers, WP/10/38. Milesi-Ferrei, G.M. (2009), The financial crisis and is inernaional ransmission: some enaive lessons, mimeo, Sepember. McGuire, P. and Tarashev, N. (2008), Global monioring wih he BIS Inernaional Banking Saisics, BIS Working Paper, No McGuire, P. and Wooldridge, P. (2005), The BIS Consolidaed Banking Saisics: srucure, uses and recen enhancemens, BIS Quarerly Review, Sepember. Nisch, V. (2009) Trade Mispricing and Illici Flows, presened a he World Bank Conference: The ynamics of Illici Flows from eveloping Counries, Sepember. Pellegrini, V. and Tosi,. (2011), Alla ricerca dei capiali perdui: una sima delle aivià all esero non dichiarae dagli ialiani, Bank of Ialy, Occasional Papers, No. 97, July. Schneider, B. (2003), Measuring Capial Fligh: simaes and Inerpreaions, Overseas evelopmen Insiue, Working Paper No. 194, London (UK). Vicarelli, F. (1970), L esporazione di banconoe nell esperienza ialiana dell ulimo decennio: una analisi quaniaiva, in Sudi conomici, No. 3-4, May-Augus. Wooldridge, P.. (2006), The changing composiion of official reserves, BIS Quarerly Review, Sepember. Zucman, G. (2012), The missing wealh of naions: are urope and he U.S. ne debors or ne crediors?, Paris School of conomics, hp:// 25

28 Appendix Inegraion of official daa on exernal porfolio socks Only in a few cases were he derived liabiliies from he CPIS higher han hose repored by he oher sources (IIP and WN II). ven hough in some cases he discrepancy was far from being negligible, he overall impac on global amouns and on final resuls was quie moderae; his is he case for he Neherlands, Germany and Luxembourg for deb insrumens and for he Unied Kingdom and Canada for equiies. For Luxembourg and he Neherlands he exclusion from porfolio liabiliies of he securiies issued by special purpose eniies (SPs) has been idenified as he main cause of he observed overreporing. SPs are frequenly creaed in specific counries by mulinaional enerprises in order o achieve benefis in erms of legal and ax advanages and of privacy. Securiies issued by SPs are generally declared by invesors as an asse vis-à-vis he counries hosing he SPs. An adjusmen has been made o he declared liabiliies whenever daa on he amoun of SPs issuance are available. For he Neherlands, official daa including he posiions referring o SPs are available. 28 In he oher cases, he informaion available is no enough o assess wheher he discrepancy is due o an over-reporing of asses vis-à-vis hese counries or o saisical disorions implying a sysemaic underesimaion of porfolio liabiliies. Accordingly, he CPIS derived liabiliies have been generally aken ino accoun as he mos realisic proxy. The choice of using derived liabiliies in he case of over-reporing made he global amoun of liabiliies increase, bu he impac of hese adjusmens on he oal amoun was quie low (less han 0.5 per cen of oal liabiliies); moreover, i has no inflaed he amoun of he discrepancy beween asses and liabiliies, as in hese cases i is by definiion equal o zero (formulas 4 and 5 in he ex). This appendix describes he inegraions and he adjusmens made and illusraes he conens of he supplemenary daa source which we have aken ino accoun in order o improve he level of coverage and consisency of he daabase (par. 4.5). Unied Saes liabiliies broken down by invesor counry The US eparmen of he Treasury collecs informaion on ransacions and posiions referring o foreign porfolio securiies hrough he Treasury Inernaional Capial (TIC) reporing sysem. 29 aa are colleced from banks and brokers. Once a year, a deailed invesigaion is conduced on he socks of porfolio securiies, broken down by issuer and invesor counry, also collecing daa from imporers, exporers and financial insiuions oher han banks. aa on liabiliies broken down by invesor counry are regularly disseminaed. However, some difficulies in correcly idenifying he counry of residence of he final invesor exis. As a maer of fac, hese saisics end o overesimae he asses of he counries in which securiies are raded and held (cusodial bias) 30 and o underesimae he asses of final invesors. The informaion on he geographic deail of he liabiliies of he Unied Saes has been used in any case o quanify he asses in US securiies held by some major counries which do no repor CPIS daa, namely China, Taiwan and he Arab oil-exporing counries. For hese counries he cusodial bias is no expeced o affec he figures significanly. 28 e Nederlandsche Bank, hp:// 29 US eparmen of he Treasury, hp:// 30 In case of long and complex chains of deposis and inermediaries, he residence of he final invesor canno be easily idenified; in paricular, according o he US eparmen of he Treasury, his cusodial bias can lead o an overesimaion of he liabiliies o he Cayman Islands, Swizerland, he Unied Kingdom and Luxembourg, and o an underesimaion of liabiliies o all oher counries (Berau e al, 2006). 26

29 Japan liabiliies broken down by invesor counry Unil a year or so ago, he cenral bank of Japan published on is websie 31 porfolio liabiliies broken down by invesor counry a he end of each year. This informaion on ransacions and posiions regarding foreign invesmens in domesic securiies was colleced hrough sample surveys. aa on liabiliies broken down by invesor counry have been used in he same way as he TIC daa for he Unied Saes in order o quanify he porfolio asses vis-à-vis Japan held by some of he major counries no reporing in he CPIS. Ireland liabiliies in equiy securiies (shares and funds) As regards Irish equiies and invesmen fund shares, here is a considerable discrepancy beween he official and derived liabiliies, presumably relaed o he presence of SPs, especially in he financial secor 32 (on average abou 42 per cen he oal liabiliies are aribuable o he banking secor). A significan proporion of debor posiions are declared by Ireland bu hey are no repored by invesor counries. On he basis of specific and confidenial informaion, i has been possible o make a reducion in his discrepancy, aribuing some of i o cerain counries. Unied Saes and Germany adjusmen on porfolio asses I has been necessary o make a correcion on CPIS asse daa repored by he Unied Saes and Germany, since for some years here have been significan differences from he porfolio asses repored in heir IIPs. The geographical percenage disribuion deriving from he CPIS has been applied o he value of oal porfolio asses as repored in hese counries IIPs. China asses (official reserves) The foreign asses held by China - a counry no reporing o he CPIS - are largely consiued by official reserves; he oal amoun is known hanks o official Chinese saisics (Sae Adminisraion of Foreign xchange) and WN II. As asses held vis-à-vis Unied Saes and Japan have been already calculaed (see above), he poin is o esimae hose vis-à-vis he remaining counries. On he basis of a sudy conduced by he Bank of Inernaional Selemens (Wooldridge, 2006) 33, we assumed ha 80 per cen of reserve asses was invesed in deb securiies. The breakdown by issuer counry has been esimaed on he basis of he geographical disribuion of he global reserve asses in deb securiies repored by all counries in he CPIS (Survey of Securiies held as Foreign xchange Reserves, SFR). Inernaional organizaions liabiliies (deb securiies) Inernaional organizaions (for example, he uropean Invesmen Bank) issue deb insrumens bu saisics on heir inernaional invesmen posiion are no published. Asses held in deb securiies issued by inernaional organizaions are insead included in socks declared by invesor counries, causing a discrepancy beween global asses and liabiliies. In order o reduce hese inconsisencies, inernaional organizaions porfolio liabiliies have been esimaed on he basis of daa on he ousanding amoun of inernaional bonds periodically published by he Bank for Inernaional Selemens. I should be noed ha he valuaion of hese socks is based on nominal values, whereas he asses repored by he invesor counries in he CPIS are based on marke ones. The differen valuaion crieria may generae discrepancies. 31 Bank of Japan, hp:// 32 The Inernaional Financial Services Cenre (IFSC) is locaed in ublin, hosing more han half of he world's op 50 financial groups. 33 I is higher han he average esimaed (70 per cen; Wooldridge, 2006, p. 32) for he developed counries, as here are reasons o believe ha he Chinese moneary auhoriies have a lower propensiy for oher ypes of financial insrumen han oher cenral banks. 27

30 The Neherlands adjusmens on porfolio liabiliies As already menioned, for he Neherlands porfolio deb liabiliies have been increased by adding he amoun of liabiliies issued by SPs, which are excluded from he official IIP (liabiliies are lower han oal asses vis-à-vis he Neherlands repored in he CPIS). aa on SPs porfolio liabiliies are published by he uch cenral bank, as already menioned. Afer he correcion, porfolio liabiliies ended up higher han declared asses. Offshore cenres asses and liabiliies The Cayman Islands and Briish Virgin Islands are he wo mos relevan offshore cenres as regards porfolio invesmens, paricularly invesmen funds. 34 These wo counries do no repor complee porfolio saisics: he Virgin Islands do no publish IIP and do no paricipae in he CPIS, while he Cayman Islands only repor he asses held by banks o he CPIS. Consequenly, for hese counries esimaions and adjusmens on boh asses and liabiliies have been made. For he Cayman Islands, esimaes are based on daa published by he Cayman Islands Moneary Auhoriy 35 (CIMA), which is he auhoriy in charge of monioring residen invesmen funds. The ne asse values declared by Cayman funds have been considered as a proxy for equiy liabiliies o foreign invesors. As for deb, he derived liabiliies calculaed on he basis of CPIS daa have been considered as a proxy because of he lack of specific and reliable informaion. Furhermore, in order o esimae porfolio asses (excep hose held vis-à-vis he US and Japan, see above) saisics from CIMA have been used as well. As for he Briish Virgin Islands, Lane and Milesi-Ferrei (2010) ried o quanify oal exernal asses and liabiliies. For wo oher major offshore ceners, Guernsey and Jersey, he inegraion o he daabase only relaes o he exernal liabiliies in equiy invesmen funds issued. Boh counries do no publish IIP bu hey do repor porfolio asses in he CPIS. The inegraion is based on daa on collecive invesmen funds published respecively by he Guernsey Financial Services Commission 36 and he Jersey Financial Services Commission. 37 Also in his case we used he ne asse value of he invesmen funds issued in hese counries o approximae he amoun of heir exernal equiy liabiliies. Whenever we have used daa on fund ne asse value, we have assumed ha: a) all equiy funds are held by foreign invesors; b) he fund invess all is asses in foreign securiies. We expec ha hese assumpions do no have an imporan impac on he esimaion of global discrepancy, as he effecs on asses and liabiliies should balance each oher. However, such assumpions may influence he counry and financial insrumen breakdown of global discrepancy. As regards he breakdown by debor counry and by financial insrumen of he asses held by he Cayman Islands and Briish Virgin Islands, we have esimaed i by adoping he hypohesis ha i reflecs he disribuion relaed o he subse of offshore and small financial cenres 38 declaring o he CPIS. Arab oil exporers asses (Sovereign Wealh Funds) The esimaes of porfolio asses held by Arab oil exporers (again wih he excepion of hose vis-à-vis he US and Japan) have been mainly based on published daa on he ne asse values of sovereign wealh funds colleced by he SWF Insiue 39 and from specific sudies (CB, 2008). In he absence of reliable informaion on he disribuion by counry and by financial insrumen, we assume 34 According o esimaes made by Lane and Milesi-Ferrei (2010), hese wo counries accoun for beween 50 and 60 per cen of oal asses and liabiliies of he 32 small inernaional financial ceners (SIFCO) counries (informaion relaing o year 2007). 35 hp:// (Invesmen Saisical iges for 2007, 2008 and 2009). 36 hp:// 37 hp:// 38 The group comprises Bermuda, Guernsey, Jersey, Luxembourg, he Isle of Man and - only for banking secor - Barbados, he Bahamas, Briish Virgin Islands, Cayman Islands and Neherlands Anilles. 39 hp:// 28

31 ha hey are proporionally disribued according o he global discrepancy. In oher words, such asses have been proporionally subraced from he global discrepancy for each combinaion of year, issuer counry and ype of insrumen (see formula A.1 below). Oher counries no included in he CPIS and IIP saisics asses and liabiliies As regards he oher counries (e.g. Taiwan) no reporing daa o IMF (CPIS and IIP) and no included elsewhere, we derived daa subjec o availabiliy on asses (porfolio securiies plus he 70 per cen of official reserves) and liabiliies (porfolio securiies) from WN II. In he absence of reliable informaion on he disribuion by counry and by financial insrumen, we assume ha hey are proporionally disribued according o he global discrepancy (see formula A.1 below). As regards he breakdown by counry and ype of insrumen of esimaed asses held boh by Arab (A) oil exporers (in securiies issued by counries oher han he US and Japan) and by counries no included in he CPIS and IIP saisics (O), we define, respecively, equiy and deb securiies as follows: asses: A AO and A AO and considering global individual counry discrepancies before he inegraion of he above U * * U U * * i U i he final amoun of he discrepancy in equiy securiies by a reference year and issuer counry can be expressed as follows (wih a similar noaion for deb securiies): A.1) i, i * * * U i U i U A AO * L i A A AO * U j U U. 29