James Saft, Reuters Columnist
It is far less clear what the impact would be should the wave of withdrawals accelerate in other peripheral states such as Spain or Portugal, which are further from outright revolt over German-led austerity, and which, due to their sheer size, will enjoy a vastly improved negotiating position.
Greeks have been withdrawing hundreds of millions of euros of deposits from their banks in recent days, driven by a rational but dangerously self-reinforcing fear that a Greek exit from the euro will leave them holding far less valuable new drachma.
That fear, though, is predicated on a shaky notion: that the players in the drama will do what they have said they would.
Greek depositors are worried that their politicians will repudiate the terms of the bailout and that the ECB and European authorities will, ultimately, cut them off, either directly or by refusing to accept dubious collateral in exchange for fresh euros.
That would bring down the Greek banking system, or most of it, and force Greek authorities to impose capital controls. Cue Spanish, Italian and Portuguese depositors, who might follow suit and start to withdraw their own deposits, putting massive amounts of collateral into the hands of the ECB and their own central banks.
The betting on this one comes down to whether you think European officials will stick with their principles or act in their own best interests, always a legitimate and uncertain question. The ECB could, at any point it chooses, pull the plug on the Greek banking system by refusing to accept the sort of bad collateral now being offered. A prudent act, utterly within their rights and a highly destructive one.
Greek depositors only have as much power as the ECB chooses to give them. The simple answer is to take more bad collateral and keep negotiating. Even if the troika elects to punish Greece by stopping payments to it there is nothing that would stop the ECB from carrying on providing liquidity to the Greek banking system. Remember too that the amount of money involved is not huge, especially in proportion to the potential damage caused by a bank-run-caused exit of Greece from the euro.
Contagion risk?
That said, if things get worse in Greece, as they are almost certain to, depositors elsewhere in the eurozone may follow suit and withdraw money from banks in weaker countries. Deposits in Italian and Portuguese banks have dropped, relatively gently, though Italian deposits are still near earlier peaks.
More withdrawals will be no surprise, whatever you think of the game of chicken between Greece and the rest of Europe. The opportunity cost of moving money is low, and even if the money is not deposited elsewhere, very low interest rates impose little penalty on cautious savers stuffing bank notes into mattresses.
The logic is even less strong for a bank run in Spain, for example, forcing a disorganised euro exit. So long as Spain, or Portugal, is making minimal progress on reforms – and they are doing better than that now – there is even less incentive for the ECB to become spooked by a rush of questionable collateral onto its books.
And if Spanish bank funds flee, the math will be the same for the ECB but the scale will be far different and argues further for forbearance rather than retribution. Something on the lines of a third of Greek deposits, or a bit more than €70bn, have left its system. Extrapolate that to the Spanish system and you are looking at more than €500bn.
That could spook Germany and the ECB, but more likely it brings Europe into a sort of de facto fiscal union, in which the affairs, credits and debits of the players are so intertwined as to utterly resist detangling. The ECB will not end the euro on its own authority, and in the event of a huge bank run it will probably prove impossible for politicians to make the decision to pull the plug quickly. That will leave the south owing the north even more, but the north having less ability to collect or dodge. Some sort of common bond issuance or fiscal union might actually be hastened by a bank run, ironically enough.
If you owe the bank a million, the bank owns you; if it is a half a trillion euros, the situation is somewhat reversed.
None of this is to say that the ECB or eurozone authorities won’t become so exasperated with Greece that they pull the plug. It may come to that, and it’s fair to say that the odds have narrowed, but we are not quite there yet.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)