Over the past decade, a number of euro area countries experienced persistent and increasing current account deficits. The underlying causes of these deficits represent disequilibria in the domestic macro-economies as manifested through the excessive foreign borrowing. While foreign borrowing can enhance economic growth and related employment, rapid increases in such borrowing, can contribute to imbalances in the domestic economy, if used unproductively. Unproductive investment has implications for the domestic economy's ability to sustain foreign borrowing as the investment must generate a rate of return that is at least sufficient to service foreign debt. Consequently, the structure of the foreign capital inflows provides insight into the rationale underlying foreign investors' behaviour.

Early warning signals that could have been employed to assess the sustainability of foreign funding would have been useful for highlighting the capability of euro area countries to absorb external shocks arising from the international financial crises and related spillover effects to other sectors of their economies. This paper explores whether structural shifts in the composition of foreign financing across various sectors of domestic economies could have provided a warning signal for the macro-economic imbalances now being endured across a range of euro area countries.

Biography: Mary is an economist in the Statistics Department in the Central Bank of Ireland, whose responsibilities include the Banks contribution to the Irish balance of payments and international investment position accounts in terms of data, methodological issues and analysis.