The Corner

The Money Bail

Via the New York Times:

…Money already has been pouring out of banks in Greece…[b]ut for European policy makers and economists, the possibility of mini-runs on banks spreading from Greece to other, bigger countries like Spain — with 1 trillion euros, or $1.25 trillion, in bank deposits — poses a much more serious risk.

…In Greece, more than two years into its financial crisis, nearly one-third of the country’s bank deposits have already left the country. There has been no such exodus in Spain so far, where over the last year about 4.3 percent of bank deposits, or 41 billion euros, the equivalent of about $51 billion, has been transferred out of the country. But that amount is in addition to a decline of 140 billion euros in foreign-owned financial assets in the last year, like the sale by foreigners of Spanish government bonds.

The trend worries European officials. At an informal meeting of European Union leaders on Wednesday in Brussels, Italy and some other countries began pushing a proposal to increase confidence in banks — and stem withdrawals — by creating a regionwide deposit insurance system to buffer account holders against banking collapses, similar to Federal Deposit Insurance Corporation in the United States. It is especially a concern for Spain, where the national deposit insurance fund is virtually bankrupt…

So far there is little sign that specific plans for a Europe-wide deposit fund are imminent. But officials in Brussels say the idea, along with the more controversial question of issuing euro bonds backed by the credit of all euro zone members, will be discussed in more detail next month when the European Union leaders hold their next formal meeting.

The idea of euro zone-wide deposit insurance has been around for a long time, but it faces the obvious political hurdle of German taxpayer resistance to backing 2.8 trillion euros worth of deposits in risky countries like Spain and Italy, as well as those that have already been bailed out — Greece, Ireland and Portugal.

Only 2.8 trillion? I cannot imagine why those stingy German taxpayers would object…

Another key question, of course, is what they would be guaranteeing. Would the zone-wide deposit insurance guarantee the deposits in “local currency” or in euros? But back to the NYT

….One indicator of money flow trends is what happens to corporate banking deposits. Corporate deposits tend to be much smaller than consumer bank savings. But because company treasurers tend to be more sophisticated when it comes to assessing financial risk, they tend to withdraw money more quickly when they perceive a bank might be troubled than individual depositors do.

In Greece, for example, corporate deposits have been fleeing much faster — by 27 percent over the last 12 months, compared to 15 percent for consumer deposits.

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