Bank Runs in Greece – Harbinger of Another Axis of Euromarket Risk?

[Joanne98]

Sometimes I can miss the blindingly obvious.

Like other observers of the widening sovereign debt crisis in Europe, we’ve commented on the fact that the big reason for Germany to work towards a rescue (more likely, the end game is a restructuring) of Greece and other Club Med members at risk is that its own banks, like those of France, are exposed if Greece defaults. Given that Eurobanks were thinly capitalized in the runup to the crisis and have recognized even fewer losses than their US counterparts, they are still fragile and vulnerable to systemic shocks. So the axis of contagion seemed to be through bank holdings of Greece sovereign debt (as well as having written CDS on Greek debt).

But we neglected to consider a more direct source of trouble, namely, that of bank runs in the countries at risk. John Mauldin’s latest newsletter tells us that is already underway in Greece:

Money is flying from Greek banks, which makes sense, as how can a bankrupt Greek government guarantee Greek bank deposits? I know that Greek bankers may have a different view, but Greek depositors are voting with their feet. And …it is not just Greece. It is fast becoming Portugal. And Spain is not far behind in my opinion.

Yves here. Despite all the noise about government debt defaults, the pattern in the Great Depression was selective default (war debt being the big favorite). However, this was also an era before bank deposit insurance was the norm for advanced economies. Moreover, Europeans may be even more quick trigger to pull funds out of banks, given that they have more direct experience of the fragility of governments (World War II memories, the implosion of Yugoslavia on its borders, the impact of general strikes). Recall that in the financial crisis, many US depositors were nervous about bank safety (witness how bank analysis service Institutional Risk Analyst offered a retail bank soundness product to cater to inquiries).

So we have a second potential axis of contagion, via impairment of banks in the Club Med countries themselves. That has the potential to affect:

http://www.nakedcapitalism.com/2010/04/bank-runs-in-greece-%e2%80%93-harbinger-of-another-axis-of-eurobank-risk.html

[roamer65]

1. Portugal and Spain are next.

The bond vigilantes sense the blood in the water and will not stop.

[dixiegrrrrl]

2. and how far behind are we?

[Kringle]

4. the US prints its own currency

the risks are different

[bemildred]

3. Big banks, get out of the big banks.

Find small, well-capitalized, and not over-leveraged institutions to put your savings in.