It’s not a run on the banks—yet. More of a jog. The implosion and bungled bailout of Spain’s Bankia in late May drew fresh attention to the dire state of Europe’s banks, particularly those in Portugal, Italy, Ireland, Greece and Spain. Jittery depositors across southern Europe have been cashing their euros out of domestic banks and moving them to German, British and Swiss ones, looking to protect themselves if the no-longer- unthinkable happens and Greece ditches the euro.
Capital has been fleeing north for the past two years, and the pace is accelerating. Greek banks have lost €72 billion in deposits since 2010, about 30% of their total. Clients withdrew €97 billion from Spanish banks in the first quarter alone. “This is a trot,” says Boston University economics professor Laurence Kotlikoff. “If it goes on long enough, though, it’s enough to clean out the banks. I’m expecting to see a physical run—long lines at banks in Greece—any moment.”
A run on Greek banks would trigger a cascade of unpredictable events. It would spook depositors in Spain, Portugal and Ireland, possibly provoking runs on their banks. Emergency bailouts in those countries would cause risk premiums on government bonds to spike. In a note to clients, UBS economists Thomas Wacker and Jürg de Spindler foretell “a chain reaction of bank runs and soaring risk premiums…that ultimately breaks up the entire eurozone.”
The growing ranks of pessimists regard a Greek default and exit from the eurozone—dubbed a “Grexit”—as a matter of when, not if. The UBS note pegged the odds at 20% in the next six months; Citigroup puts it at 50% to 75% in the next 18 months.
Help may be too late coming, if it comes at all. The European Central Bank, having already doled out more than €1 trillion in bailouts, looks unable to do much more. The ECB is leveraged to the hilt already, with liabilities 35 times its capital and reserves. (The Open Europe think-tank pointedly observed a year ago that Lehman Bros. was leveraged at around 30 times when it blew up.) If Greece defaults, not even the central bank’s solvency is guaranteed. And the European Stability Mechanism—a new, permanent bailout fund— won’t be up and running until July. Whether or not Greeks accept continued austerity in order to retain the euro in the June 17 election will be the bellwether for what follows.
“We have now reached a point where European integration, in order to survive, needs a bold leap of political imagination,” ECB president Mario Draghi said on May 24. But that bold leap—which would involve closer political integration and ceding some fiscal sovereignty to Brussels—looks politically impossible. The weak countries, with austerity-fighters in office or ascendant, won’t accept that plan. The strong ones, particularly Germany, don’t feel they should have to. If no one blinks, everyone will pay.
Even in their rage against Brussels and Berlin, 71% of Greeks and 60% of Spaniards say they want to keep the euro, a Pew survey in May found. That’s what they say they hope for. But their bankbooks show they’re planning for the worst.