Will Europe’s ‘bank jog’ become a run?

Greece is on the verge of a full-blown bank-run in the run-up to the election. But could the panic spread to Spain?

All the fuss about Greece's public finances has distracted attention from "a more mortal threat to the single currency", says the FT: Europe's banking systems. With money now being withdrawn from Greek banks at an accelerating pace, the danger is that a bank run could develop and not just in Greece. "As depositors across the eurozone factor in the increased risk that their assets could also fall victim to a break-up", runs could spread, says The Economist.

There is no mechanism for leaving the single currency, so fears of a turbulent Greek exit are widespread. "A bank run can quickly develop into a bank and sovereign collapse," says Mike Riddell at M&G. There is no Europe-wide system for guaranteeing deposits or restricting withdrawals; bank regulation has remained national.

That's another reason runs could rapidly spread across borders. The money in Europe's rescue fund is insufficient to cope with a financial crisis across the periphery. That raises the spectre of a series of defaults as spooked bondholders ditch sovereign debt and chaotic exits from the euro.

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Greece's bank jog

Europe's indebted southern countries, and especially Greece, have been suffering a slow-motion bank run, or bank jog', for some time as fears of default have intensified. Italian banks' foreign deposits have fallen by 20% in a year, for instance. By the end of March, Greek deposits were down by 17% on an annual basis. In the ten days after the 6 May election, savers pulled out £3bn. Up to €1.2bn may have flooded out last week.

No wonder. Now that an exit is becoming increasingly likely, fears of having euros turned into devalued new drachma are prompting Greek depositors to flee. "It is perfectly rational" for them to do so, says Wolfgang Munchau in the FT. Once a run has started, it is "rational to participate" in it to ensure your cash doesn't disappear.

Could Spain be next?

The government and Bankia, a recently bailed-out collection of savings banks, have denied that the bank's clients have been withdrawing deposits, says the FT. "But the appearance even of false rumours is a sign of danger." Confidence in the system has dwindled. A key problem is the government's apparent reluctance to acknowledge the extent of the bad loan problem, which in turn creates uncertainty over how much more money it might have to inject into the system and what that might mean for Madrid's stretched finances.

It emerged late last week that the value of bad loans has risen by a third in the past year. It's not just commercial and private mortgages going sour as the housing bubble bursts, says Landon Thomas in The New York Times. More and more small businesses are defaulting. "The Spanish recession has started to feed on itself."

In Ireland, too, depositors have ample reason to get their cash out. Fxpro.com notes that banks are suffering from a jump in non-performing loans. Deutsche Bank reckons loan loss provisions will need to be raised by €4bn "over and above what was specified in last year's stress tests". With the government "backstopping the banks, it might need to apply for another bail-out".

Time is running out

If Greece does leave, it could accelerate the peripheral bank run as it would demonstrate that the euro really can break up, says Paul Krugman in The New York Times. Depositors would be all the more likely to fear the return of their national currencies.

The Greek banking system could collapse even before the June election if a mass run sets in, adds The Economist. That "would wreck the credibility of pledges that banks across the eurozone are safe". A eurozone-wide bank deposit insurance scheme could stop a continent-wide bank run, says Munchau. But with only weeks before a possible Greek exit, time to establish one is extremely short.