The bank runs in Europe

I pointed out on Tuesday that Greeks were making a run on their banks, withdrawing vast amounts of money in cash for fear that the country will be forced out of the Eurozone.  It looks as if the situation there is getting worse almost by the hour - and now banks in Spain are experiencing a similar panic.

The problem with bank runs is that once they start, they don't stop. And while the world was conveniently distracted by events in Greece, debating whether or not people were withdrawing money in droves (they were), the real bank run happened elsewhere, namely in Spain, where just nationalized bank Bankia moments ago plunged 30% and was halted following an El Mundo report that "customers had withdrawn €1 billion over the past week." In other words -  a bank run (but whatever you do, don't call it that - it's not the politically correct and accepted nomenclature) which has sent shockwaves through Europe ...

. . .

The news has started to spill over to other PIIGS banks ...

There's more at the link.  Furthermore, Moody's has just downgraded the credit ratings of 16 Spanish banks.

If Spain is following Greece down the slippery slope, I'm willing to bet that a bank run has already begun in Italy too.  It may not be on the same scale as in Greece and Spain (yet), and it may not have hit the headlines (yet), but I'm confident that it's happening.

The problem faced by banks in all the at-risk Eurozone nations (Greece, Spain, Portugal, Italy, and to a lesser extent Ireland) is that their present currency, the Euro, will continue to serve other nations in the Eurozone even if all the at-risk nations withdraw from it.  The citizens of the at-risk nations know full well that if their countries abandon the Euro and revert to their pre-Euro currencies (the Greek drachma, the Spanish peseta, the Italian lira and the Portuguese escudo), the latter currencies will trade at a significant discount to the Euro in terms of exchange rates.  For example, the foreign exchange market might snub a newly-reintroduced Greek drachma by relegating it to a punitively low rate of exchange against the Euro.  Furthermore, in order to safeguard the national economy and their political crony corporations, the Greek government might deliberately peg the drachma at a very low rate against the Euro.  Either or both occurrences will mean that Greeks will lose a great deal of the value in their bank accounts and personal savings.  (Figures of 40%-50% as initial losses are already being freely bandied about in some European circles.)

On the other hand, Greek citizens (and those of Spain, Italy, etc.) have an automatic hedge available.  If they open Euro-denominated accounts in other Eurozone countries, they can deposit all their Euros in them before the new national currency(ies) are introduced.  They can then either keep those 'offshore' Euro accounts for future use, or swap their Euros for their new national currencies (or other currencies such as the US dollar) at what they hope will be a much better rate of exchange than will be offered by their local banks, or forced upon them by their governments.  Those who can't afford or aren't able to set up bank accounts in other Eurozone countries hope to take their cash holdings of Euros across the border in due course, to exchange them in the same way.  (I'm sure that will be declared illegal, but when has that stopped anybody during a crisis?)

That's why the bank runs are occurring - because European consumers aren't stupid.  They can see what's coming at them, and they're trying desperately to salvage what they can before the economic tsunami hits. A collapse of this magnitude will take much of the world's economic prosperity with it.  It can only be (temporarily) averted if central banks (including the US Federal Reserve) print money hand over fist, thereby sparking massive and prolonged inflation - which will, in the end, have the same effect of wealth destruction.  Such a step will merely prolong the agony.

This crisis, of course, underlines the futility of the Euro experiment to begin with.  The Telegraph noted today:

Starved of investment, large sections of the Greek and (increasingly) Spanish economies are now opting out of the financial system altogether, and reverting to ancient forms of barter and self-sufficiency. The disappearance of conventionally recognised economic activity is being accompanied by a reversion to pre-modern methods of social control exercised by militias, which gain their legitimacy from a common ethnic identity and distrust of outsiders. These local organisations, which in some cases are starting to find powerful allies at a national level, explicitly reject the tolerance and plurality that formed the ideals that inspired the European Union in the first place.

. . .

Just over 10 years ago, Wim Duisenberg, the first president of the European Central Bank, observed that historically the rearrangement of currencies only came about as a result of the destruction of national boundaries. The euro, he noted, “is the first currency that has not only severed its links to gold, but also its link to the nation”.

This audacious experiment has turned out to be a disaster. The size of the various bail-out funds so far mobilised to rescue the eurozone countries ... is far larger in real terms than the reparation payments and reconstruction plans of the First and Second World Wars combined.

Again, more at the link.

As I said on Tuesday . . . brace yourselves.

Peter