Where The Money Was

by Andrew Stuttaford

The Eurozone rumor mill is churning away busily today, but while we wait to see what emerges from the talks over the next two days, keep an eye out for stories like this (from Der Spiegel):

Georgios Provopoulos, the governor of the central bank of Greece, is a man of statistics, and they speak a clear language. “In September and October, savings and time deposits fell by a further 13 to 14 billion euros. In the first 10 days of November the decline continued on a large scale,” he recently told the economic affairs committee of the Greek parliament.


…[T]he outflow of funds from Greek bank accounts has been accelerating rapidly. At the start of 2010, savings and time deposits held by private households in Greece totalled €237.7 billion — by the end of 2011, they had fallen by €49 billion. Since then, the decline has been gaining momentum. Savings fell by a further €5.4 billion in September and by an estimated €8.5 billion in October — the biggest monthly outflow of funds since the start of the debt crisis in late 2009…[T]he Greeks today only have €170 billion in savings — almost 30 percent less than at the start of 2010.


The hemorrhaging of bank savings has had a disastrous impact on the economy. Many companies have had to tap into their reserves during the recession because banks have become more reluctant to lend. More Greek families are now living off their savings because they have lost their jobs or have had their salaries or pensions cut. In August, unemployment reached 18.4 percent. Many Greeks now hoard their savings in their homes because they are worried the banking system may collapse.


Those who can are trying to shift their funds abroad. The Greek central bank estimates that around a fifth of the deposits withdrawn have been moved out of the country. “There is a lot of uncertainty,” says Panagiotis Nikoloudis, president of the National Agency for Combating Money Laundering. The banks are exploiting that insecurity. “They are asking their customers whether they wouldn’t rather invest their money in Liechtenstein, Switzerland or Germany.” Nikoloudis has detected a further trend. At first, it was just a few people trying to withdraw large sums of money. Now it’s large numbers of people moving small sums. Ypatia K., a 55-year-old bank worker from Athens, can confirm that. “The customers, especially small savers, have recently been withdrawing sums of €3,000, €4,000 or €5,000. That was panic,” she said.

I recently took a look at how another flawed currency system, Argentina’s dollar/peso peg,  had splintered during the course of 2001, concluding as follows:

[W]hen the dominoes of finance finally fall, they fall quickly. To return to the IMF’s grim textbook: “The crisis broke with a run [on] private sector deposits, which fell by more than $3.6 billion (6 percent of the deposit base) during November 28-30.” At that point the game was up. The authorities’ response (notably the introduction of the corralito) should alarm depositors throughout the PIIGS as they mull how their governments might stop precious euros escaping to safe havens abroad in the wake of bank runs at home.  The corralito limited cash withdrawals from individual bank accounts to the equivalent of $250 a week (the dollar value would soon fall sharply). And the response to it should worry those now running the PIIGS. Argentinians took to the streets and reduced the country’s political order to chaos. Depending on how you define the term, Argentina had five presidents in less than a month, but none could change the inevitable. The country defaulted on its debt, the peg was scrapped, the peso tanked, and the corralito was replaced by the corralón, the centerpiece of an even tougher regime. Depositors were allowed to withdraw a little more money than before, but only in heavily depreciated pesos. Term deposits were frozen, and transfers of money out of the country heavily restricted. Not so long after, dollar deposits were switched into pesos, and the ruin of Argentine savers, many of whom lost their jobs as the economy crashed, was complete.


History does not always repeat itself. Maybe those remaining Greek depositors are confident that, however battered their nation’s finances, its guarantee of bank deposits up to some $135,000 will hold up through the toughest times. Maybe they have faith that Greece will stick with the euro. And maybe they trust that, should the walk from Greek banks turn into a run, the European Central Bank will do what it takes to put things right. But if they do have any doubts, they can, for now, easily move their euros to a part of the eurozone—Germany, say—where there is no currency risk and bank deposits are blessed with a guarantor that is, you know, solvent. Thinking like that is how a run on the banks can begin. Paranoid? Well, if you were a depositor with a Greek bank, what would you do?


And, if you were a depositor in an Italian bank, watching all this and aware that money is ebbing away from Italy too, what would you do?


I know what the Argentine advice would be. Run.


And if the Greeks run, and the Italians run, who will be next?

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