Jeff Kleintop’s latest research piece looks at the potential of a bank run should the mid-June Greek elections produce an unfavorable outcome. Some war-gaming from the LPL Financial chief strategist below. – JB
Potential Post-Election Chain of Events
The series of events following the election if the anti-austerity parties garner enough votes to endanger Greece’s membership in the Eurozone may begin with an acceleration of large withdrawals of euros from Greek banks for fear of a forced conversion to a “new” drachma at a substantially devalued level. Nearly one-third of deposits have already left Greek banks over the past three years as the risk has risen. Interestingly, the Greeks voted against German influence for their economy, but want German protection for their money as Greek bank deposits flee to German banks. Greek banks have seen outflows of 70 billion euros, while at the same time, German banks have seen deposits grow by 200 billion euros as depositors around the Eurozone seek safety. This flow is already accelerating but could become a flood.
Chart 1: Bank Deposits Leaving Greece for Germany
Next in line may be banks in other southern European countries. With the precedent set that countries could leave the euro at the behest of Germany, deposits may leave Spanish and Italian banks, which so far have only seen a small move.
Chart 2: Bank Deposits Now Beginning to Leave Spain
This could then be followed by panic with banks closing their doors for “bank holidays” to halt the runs. The European Central Bank would likely have to inject massive amounts of capital to keep the banks from collapsing.
Josh here – Jeff’s take is that this chain of events could be stopped, but deferral and procrastination aren’t going to help matters. He views fiscal union/eurobonds as the only workable solution.
Too bad the Germans disagree :(