A run on Greek banks is currently going on. According to a statement by the Greek president and confirmed by the central bank in Athens, depositors withdrew nearly $900 million from bank deposits on Monday. Data are not yet available on outflows for Tuesday and today, but the European Central Bank (ECB) announced measures that hint at continued bleeding from the Greek banking sector.
Two factors are contributing to acceleration of the crisis:
First of all, Greek politicians failed to agree on a coalition government and instead opted for a new election scheduled for June 17; in the meantime, a caretaker government will run the country. What is most disheartening in this situation is that the three political parties, which could not bridge their differences, actually agree on committing to keeping Greece in the euro area. According to the latest polls, 78% of the Greek population also agrees with the effort to maintain membership in the European single currency. So, what went wrong? Apparently, political calculations about who may gain or lose in a second round of elections prevailed over a sense of shared responsibility, clearly to the annoyance of European partners who are trying to help Greece out, as it lurches from one manifestation of this crisis to another.
And here’s a second factor which has come into play: more overtly than in the recent past, European leaders are discussing the possibility and implications of a Greek exit from the euro. This was, up until very recently, a major political taboo. But facing the noncommittal attitude of politicians in Athens, Greece’s exit has finally become an admitted topic of conversation in European political and economic circles. European governments remain committed to preserving monetary union as it stands; this was very clear in the words of German Chancellor Angela Merkel and the newly-elected French President, Francois Hollande, on Tuesday. Yet there is also a clear change in the atmosphere, as Europe is beginning to show its embattled, Southern partner that patience is running out. The European Central Bank sent a signal today, by refusing to extend ordinary credit to four Greek banks, forcing them to borrow money from the ECB emergency lending facility. The message from ECB President Mario Draghi could not be louder: the time for “business as usual” is over.
No wonder this development resulted in growing panic among the Greek public; individuals are more or less running to rescue their savings from the banks. This is adding a new twist to the analysis of what may lie ahead.
We have long held the view that Greece was unlikely to exit the euro area, because the economic consequences would be catastrophic, including, first and foremost, a widespread bank run that could leave the country’s financial system in tatters. But we tended to view a classic bank run as a consequence of a deliberate move toward breaking up the euro. What we are now seeing is the unintended consequences of poor, political choices by parties which are still committed to the euro. The new question to be asked is: can a bank run become the cause, rather than the first consequence, of one nation’s exit from the single currency area?
This is a new scenario adding uncertainty as politicians and investors deal with a shifting reality. For the time being, we maintain our view that a breakup of the euro area would be catastrophic, and simply too expensive for all parties involved: for Greece, for the other, troubled, Southern members exposed to contagion and to the countries at the core of the union. But months of delays, half-baked responses, mixed signals, ideological rigidities and flat-out denials are taking a toll and fueling social and economic processes that European leaders may, in the end, be incapable of controlling. In any case: we have messy weeks ahead of us.