By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil
Well, there’s been a lot of talk recently about a potential Greek exit from the Eurozone. Some, like Marshall Auerback , have been calling this a lot of hot air and in seems that, in light of recent events taking place from deep within the bowels of the Eurozone banking system they may indeed be correct.
Yesterday, Gavyn Davies over at the Financial Times blog ran an excellent piece on the silent bank run that has been taking place across Europe since the sovereign debt crisis began. It would seem that the bank run has sped up somewhat, as many will likely be dimly aware of from recent articles about bank deposits moving out of Greece. The extent to which it has accelerated, however, is quite interesting and can be seen in the following chart which tracks the Target2 interbank lending system in the Eurozone:
As the reader can see the flight out of the ‘dodgy banks’ in the periphery has increased quite a bit.
The reason for this, as Davies points out, is not the type of reason classically associated with a bank run. In a typical bank run depositors get nervous that the bank will not be able to fork over their cash should they want it. Many may remember the Simpsons scene where the hapless bank clerk tells panicking customers that their money is “at Bill’s house… and at Fred’s house”. Well, that’s basically your classical bank run. So, all the central bank has to do to counteract it is to step in and provide the liquidity. Then depositors will come to see that their money is guaranteed to be safe because the central bank — which prints money — is standing behind their bank ready to meet their desire for hard cash. The ECB, for whatever else it has done wrong, has performed this role perfectly throughout the recent crisis.
However, the bank runs nevertheless continue. Why? Because this is not, as Davies points out, a typical bank run. The reason that people are moving their deposits from peripheral banks to core banks is not because they are concerned about the peripheral banks’ ability to repay. Instead they are concerned that their government might exit the euro and reissue its own currency. In that case there is a good chance that if their deposits were sitting in a bank in their own country they would be converted into the new currency and, hence, automatically devalued vis-a-vis the euro (or neo-Deutschmark if the whole thing fell apart). If the depositor moves their money to a German bank, however, this shouldn’t be a problem — and given that there are no capital controls in Free Europa, moving your money is pretty easy.
The real problem — for the Germans, that is — is that, as Davies points out, in preventing a bank run the ECB is loading up on some pretty serious risk:
“As deposits are withdrawn from Greek banks, the ECB replaces these deposits with liquidity operations. If these are standard repo operations, such as those undertaken in the LTROs in December and February, then the ECB is directly assuming risks which the Greek private deposit holder is no longer willing to hold. If the liquidity is injected via Emergency Lending Assistance, then the Bank of Greece is theoretically assuming the risk, rather than the ECB as a whole. But in the event of a euro break-up, these losses would ultimately fall on the ECB itself.”
See the dilemma here — at least from a German point-of-view? This silent bank run is seriously stacking risk upon risk onto the ECB balance sheet. Now, as long as the currency union stays together this isn’t really a problem. But if one of the links in the chain snaps, the ECB balance sheet takes a hit — a big hit.
Now, since the ECB issues its own currency this is not really a problem from an operational point-of-view. Central banks, after all, can never really go bankrupt. However, the Germans hate the idea that the ECB might allow its balance sheet to take significant losses.
So, what does all this mean? Well, it looks like the Greeks have just got a rather massive bargaining chip handed to them by the citizens of the periphery voting against the Germans by removing their deposits from peripheral banks. A classic case of subversive European democracy in action, it would seem!
Given this set of circumstances, if the Greeks are to exit it will be a major headache for the Germans and the ECB. And so it looks like Mr. Tsipras, who has recently come out talking eminent sense about what is going on in the Eurozone at the moment, is holding far more cards than many in Germany and Europe are likely to be comfortable with. And so the only people that are looking ring-fenced these days are Merkel and her political allies. Schadenfreude, much?