Does the euro ‘endgame’ begin with a run on the banks?

Does it end with a bang or awhimper? Will Greece slide quietly out of the eurozone because everyone’sexhausted by the cost and effort of keeping it in, or does the end comesuddenly with an outbreak of panic followed by the imposition emergencymeasures?

If it’s going to be the latter, the spark could easily be a runon a bank somewhere in the eurozone, and not necessarily in Greece.

The Spanish bank, ‘Bankia’which was formed by a merger of troubled lenders when the property crash was atits worst, issued a statement this afternoon intended to reassure those withmoney in its vaults: “depositors can be quite sure of the safety of theirsavings entrusted to Bankia”, it said, going on to blame the recent heavywithdrawals (€1.3bn since last Wednesday) on ‘seasonal factors.'

This israther like a football club chairman making a statement that he and the boardhave full confidence in the manager. You just know there’s trouble ahead.

The bank's share price has also dipped, reflected euro-zone panic Credit: Reuters

The Spanish problems may or may not be connected to news that Greeks have taken more than a billion euros from their accounts in the last few days.

Confidence in banks is a fragile thing, and there are two reasons for people in the troubled Mediterranean economies to be worried: everyone knows that banks don’t have enough cash to repay their depositors if they all want their money back at the same time, and there’s a real fear that a sudden exit from the euro - to be replaced by a devalued new currency - would devastate the value of any savings not under the mattress or in an account in Germany.

That’s what happened to savers in Argentina when their Government abandoned the peg to the dollar in the early 1990’s.

Savers were caught by surprise, their bank accounts frozen, and any who didn’t have their dollars in cash or out of the country were forced to exchange them for devalued pesos. Many were wiped out.

Is that what would happen if the euro started to break up? Why take the risk when, if you’re quick, you can put the money somewhere that your Government can’t devalue it?

And that is how bank runs start. We saw it here with Northern Rock back in 2007 (though for different reasons) and we saw how - once it starts - a run can quickly spin out of control.

Northern Rock suffered a 'bank run' in 2007 Credit: reuter

What would happen if there were to be panic withdrawals in Greece between now and the next election on Jun 17th? Curiously it might have one of two, opposite, effects.

It could provoke a sudden and uncontrolled departure from the euro. If depositors started removing large sums, the banks would quickly run out of cash - remember that Greek banks are already woefully under-capitalised.

Normally the ECB would provide emergency liquidity, ie more money, but in these circumstances it’s easy to imagine that they’d refuse. Without the cash to pay wages or pensions or settle bills, there would be little alternative but to print money, and the money they printed would not be euros. Greece would be out of the single currency.

The other scenario is that a run on the banks, queues at cash machines, the shutters going down, would finally convince the Greeks that life outside the euro might be even worse that their present suffering within it, and pull them back from the electoral brink just in time.

A bank run in Greece could be the catalyst for a decision on the euro-zone Credit: Reuters

It’s already a very fearful time for Greeks, and most admit that they simply don’t know which route - in or out - is going to be worse.

The first signs of total economic collapse may, just may, convince them to stick with the devil they know. The obvious danger with this scenario is that it may, by then, already be too late. Once confidence in the banking system has gone, it is very difficult to put the genie back in the bottle.

The eurozone has quite enough money, of course, to prevent any of this from happening. Greece is a tiny economy within a much greater, and still very wealthy, whole. Its not a lack of cash that would be the problem, but a lack of will.

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