How Europe’s banking crises threaten the eurozone

By Felix Salmon
May 16, 2012

The size of the run on Greek banks is not at all clear: while it seems that something on the order of €1 billion has left the banks of late, it’s less obvious whether that was over the course of one day, three days, or two weeks. The big picture, though, is unambiguous:

IVjhsG.jpg

What you’re seeing here is Greece down to its last €165 billion or so in deposits, and at the margin the rate of decrease is probably accelerating, despite the fact that most sensible Greeks will have already stashed their hard-earned euros safely outside the country a long time ago. I don’t know what the minimum amount is that Greeks need on deposit just to serve their near-term liquidity requirements, but we’re not there yet: Greece’s total population is only 11 million. So there’s a long way further this number can fall — especially since the Greek banking system isn’t receiving the support it needs from the ECB.

The more realistic constraint is simply that many Greeks lack the education and sophistication and language skills needed to move their money out of the country. This, for instance, is telling:

A 60-year-old textiles store owner who gave his name only as Nasos said he had transferred 10,000 euros over the phone to a bank in fellow euro zone state Cyprus on Tuesday afternoon.

If Greece exits the euro, there’s no doubt that there will be a massive banking crisis in Cyprus — it’s pretty much the least safe haven conceivable for someone looking to move their money from Greece. The only reason to move money to Cyprus rather than, say, Luxembourg is that they speak Greek there, and the logistics of moving money to Cyprus are easier than the logistics of moving money to any other country.

Meanwhile, in the rest of the eurozone periphery, foreigners are already pulling their deposits from Italian banks, while the Spanish banking system is only getting increasingly precarious:

JNGKLL.jpg

All of which is to say that the causal relationship between sovereign crises and banking crises is rather more complicated than one causing the other: in reality, they cause each other, in a vicious cycle which clearly isn’t close to being broken in any of the southern European states. Greece is further along in the cycle than Spain or Portugal or Italy, but they’re all still moving in the wrong direction.

Greece’s banks, remember, are the mechanism by which the rest of Europe will force Grexit. Banks are the circulatory system of any economy: if they stop pumping money, the country dies. And so, in extremis, Greece will need to do a complete blood transfusion, replacing all euros with drachmas, if the only alternative is to see the flow of euros dry up entirely.

In the meantime, however, expect to see deposits continue to leave Greece — and the rest of the European periphery as well. Even if your euros are reasonably safe in a big Italian bank, they’re surely safer in a big German bank. And the first thing that all depositors want is safety. Now that questions have been raised about the solvency of various southern European banking systems, it’s going to be very hard to reconstitute the eurozone in a robust fashion. The Eurozone was never designed to cope with millions of Spaniards moving their money out of the country, behaving like middle-class Venezuelans with offshore accounts in Miami. And it also was never designed to cope with capital controls. But increasingly, it looks like we’re going to end up with one or the other. Or both.

15 comments

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I’m getting a little ahead of myself here, but if you are so worried as to send your euros to France or Sweden for safekeeping, would you not also think of moving there along with your money? The next giant sucking sound is one of hundreds of thousands of feet running northward. Yikes!

Posted by LadyGodiva | Report as abusive

Of course, feet don’t make sucking sounds, do they, but, well, you get the point.

Posted by LadyGodiva | Report as abusive

If you actually want to salvage this situation you basically have one option left. You send in the German/French army (best to let the French handle Greece and the Germans any other states), set up an occupation government, and establish a new constitution with massive austerity/confiscation and actual taxes that are actually collected.

You then put the government back on solid footing, and can leave within a few years.

Yes several thousand (and possibly tens of thousands of) people will die. But that is what is is going to take to hold Europe together, the only thing that ever does hold anything together, coercive force.

Right now you have a family of 20 people with only a few adults and everyone has access to the bank accounts. It was only a matter of time before that system fell apart. It is time for France and Germany to put on the mommy and daddy pants and discipline their children.

Posted by QCIC | Report as abusive

Lady-

The cost of living differential, lack of employment prospects, and lack of giant social largess you have access to is probably enough to keep them there until the actual crisis hits. This is all just the pre-crisis.

Posted by QCIC | Report as abusive

Whoever forms and leads the next greek government could conceivably counteract this phenomenon, at least a little, in an ex post facto manner.

What I would do if I were a Greek finance/treasury minister is gather reports from the Greek-domiciled banks as to which depositors have transferred a large percentage of their accounts’ Euros out of the country recently, and then among those former depositors, which ones are civil servants, current government employees and contractors or pensioners.

Then, when the government switches to new Drachmas, pay said civil servants and other government employees and with negative valued Drachmas in an amount equal to the amount transferred out of the country. Those people who expected to be paid by the Greek government would be outraged, but they could then make up their lost expected pay by transferring their expatriated savings back into the country, by exchanging them for Drachmas of course.

Wouldn’t totally make up for the slow-motion bank run, but it would help. Every little bit counts.

Posted by Strych09 | Report as abusive

Lady / QCIC – I’d add language / cultural barriers to that list of why Greeks won’t move to other countries, which is also a big underlying problem with the Eurozone.

To be politically tenable, a large degree of fiscal union across the Euro-zone would require some combination of an electorate who thinks of themselves primarily as “Europeans” rather than citizens of particular nations, labor mobility across countries (which would help harmonize inflation rates, productivity, etc.), and direct election of central decisionmakers. It’s not a coincidence that the U.S. federal government didn’t spend much money until people thought of themselves primarily as “Americans” rather than “New Yorkers” or “Virginians”, which took a long time (and a bloody Civil War) even in a nation that had a common language.

Posted by realist50 | Report as abusive

Ummmm….The US did not have a common language per se until after WWII.

There were places in the midwest where you needed to know German to get around, etc.

Posted by Matthew_Saroff | Report as abusive

Of course Capital Controls could have (and still can) reduced the scope of the problem. Plenty of countries in the world have imposed capital controls in times of crisis (the most recent very public example being the smarter Asian countries in the late 90s) and it generally has worked out OK — that is, better than the likely alternative.

It would be an interesting investigation as to whether it was theology (“capital controls are the spawn of the devil” as truly believed) or simple corruption that has prevented the idea from even being seriously raised, let alone implemented, in Greece.
(And yeah, yeah, I’m sure there are probably various EU laws Greece has signed up to that prevent capital controls. You’ll notice that when it’s convenient for the wealthy in EU countries to ignore these laws — 3% deficit, 60% debt, anyone? — those laws have just been ignored.)

Posted by handleym | Report as abusive

It may be that a German bank protects a Greek’s Gyros ;) from disappearing, but it does not hedge against the devaluation of one’s money, were a Greek exit to occur.

Posted by GRRR | Report as abusive

As Peter 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.”

http://bubblesandbusts.blogspot.com/2012  /05/bank-runs-begin-can-europe-put-geni e.html

Posted by Woj | Report as abusive

I appreciated the first chart. However, the rest of the article is full of silly ideas that must have just been the first thing that popped into the author’s head.

Surely the insolvency of the Greek banking system involves quite a bit more than whether or not there is enough cash on hand to meet immediate transaction needs! How much confidence in your bank would you have if you were told not to worry, because if you need to withdraw $20 for lunch, they had it.

And yes, Cyprus will be a lot safer than Greece to store money, because Cyprus isn’t imminently dropping out of the Eurozone, and about to convert Euros held in its banks into a weak successor currency.

And how does a chart showing non-performing loans rising four years ago proves the Spanish banking system is “only getting increasingly precarious”?

Sloppy, sloppy journalism.

Posted by emiliano | Report as abusive

THIS MAY BE THE END OF THE EU. THEY TRIED BUT IT WILL NOT WORK DUE TO NATIONS LIKE THEIR OWN POLITICS OVE OTHERS

Posted by VINIBOMBA | Report as abusive

THIS MAY BE THE END OF THE EU. THEY TRIED BUT IT WILL NOT WORK DUE TO NATIONS LIKE THEIR OWN POLITICS OVE OTHERS

Posted by VINIBOMBA | Report as abusive

THIS MAY BE THE END OF THE EU. THEY TRIED BUT IT WILL NOT WORK DUE TO NATIONS LIKE THEIR OWN POLITICS OVE OTHERS

Posted by VINIBOMBA | Report as abusive

Perhaps Spain should quickly enact principal reductions to fair market value for the loans that are still performing. When the mortgage holders are once again able to build equity, they will stop walking away and there will finally be a floor under falling home prices.

Posted by breezinthru | Report as abusive