Thursday, May 17, 2012

Bank Runs Begin: Can Europe Put the Genie Back in the Bottle?

The idea is this: when funding from the troika is cut off after a default, the Greek government will lack the resources to backstop its banking system.  Moreover, euro transfers via Target will be cut off.  Greek depositors who try to withdraw their funds will be told, sorry, but the cupboard is quite bare.  This will ignite a banking meltdown, and the only way out for Athens will be to redenominate financial liabilities in a new currency they can supply.  Whether they call it a drachma is up to them.

Clever, huh?  The only hitch is that, now that the game plan is becoming clear, rational Greeks are not choosing to wait for an EZ attack before withdrawing their funds from Greek banks and transferring them somewhere, anywhere, else.  There is a gradually accelerating bank run taking place which is likely to reach criticality before a Greek-EZ policy showdown can take place.
There is a broader lesson here.  By threatening to choke the Greek banking system, the EZ implicitly threatens to do the same for Spain or even Italy.  They can say otherwise, but why should depositors in shaky peripheral banks believe them?  Withholding euros from peripheral banking systems is a gun that goes off before it is fired.  Simply brandishing this weapon is causing havoc and speeding the demise of the entire zone.
Read it at EconoSpeak
The Problem with the Eurozone’s Throw-Greece-from-the-Train Plan Is that its Timing Can’t Be Controlled
By Peter Dorman

(Source: How Europe’s banking crises threaten the eurozone by Felix Salmon at Reuters)

Greece has been experiencing a slow motion bank run for the past couple years, as the above graph shows. Deposits in the country are down more than 30% during that period and updated data for the past few months may show this trend accelerating. The declining level of deposits puts pressure on banks to sell assets and restrict credit, exacerbating deflationary pressures in the economy.

As Dorman points out, recognition that Greece may be covertly pushed off the Euro should/will spark fears amongst depositors within other peripheral countries. Just this morning Zero Hedge reports that a Nationalized Spanish Bank Plummets On News Of Bank Run:
From FT:
Shares in Bankia, the Spanish bank which was part-nationalised last week, plunged by over a quarter on Thursday morning, after a report that customers had withdrawn €1bn from the bank over the past week.
The ECB/EU/IMF have been fairly successful, to date, at kicking the can down the road. Sadly this extra time has not been used to enact effective measures for resolving the underlying problems. Further attempts to buy time should be expected, but as these bank runs accelerate it will become increasingly difficult to stem the tide. Nearly 3 years after the first Greek bailout the Eurozone crisis may finally be approaching the endgame. Despite the enormous costs to a disorderly dissolution, I remain unconvinced that politicians will overcome their differences in some type of “grand bargain.”

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