The analysts’ conclusion is that a bank run is under way in Europe.
The fear of bank runs is deeply ingrained in all economists who know anything about the genesis of the Great Depression in the United States in the early 1930s. Then, the failure of the Bank of United States in December 1930 led to multiple bank runs across the country. Bank failures in the following two years wiped out personal savings and greatly exacerbated the collapse of demand in the economy.
The classic account of the crisis, by Milton Friedman and Anna Schwartz, concluded that the collapse was largely the fault of the Federal Reserve, which failed to provide enough liquidity to keep the banks functioning and thus end the panic.
On Monday, Gavyn Davies, who chairs Fulcrum Asset Management, and is an adviser to the British government, wrote in the Financial Times: “A bank run is now happening within the Eurozone. So far, it has been relatively slow and prolonged, but it is a run nonetheless. And last week, it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers.”
On Tuesday, a report from Citigroup analyst Matt King who took Greece, Ireland, and Portugal’s documented withdrawal rates and applied them to Spain and Italy, said, In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52 percent, and foreign government bond holdings by an average of 33 percent, from their peaks.” Further, he said, “The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further $272.17 billion and $270.9 billion in capital flight respectively, skewed towards deposits in the case of Spain, and towards government bonds in the case of Italy….Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly, significantly accelerate the timescale and increase the amounts of these outflows.”
Wednesday saw the release of a report from Nomura analysts showing that the exodus of funds wasn’t limited to banks and had been increasing since March: Portfolio investments saw a net outflow of $44.58 billion (compared with February net inflows of $24.2 billion). The main reason behind the negative overall portfolio flows was the activity of Eurozone investors, who bought $76.43 billion of foreign assets, mainly bonds and money market instruments. This is the largest foreign investments in almost 1.5 years.
There was further proof of the capital racing out of most of the EU on Thursday as the Financial Times reported: Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the Eurozone and single currency turmoil.
And, Friday’s news of Bankia, Spain’s 4th largest bank, suspending its stock and Moody’s downgrade of some Nordic banks which many had assumed safe has only added fuel to the fire. Get ready, folks. If you haven’t already, sell those bank stocks and run to the nearest exit.
Because, now, America’s banks are starting to get ready for Mr. Toad’s wild ride! And, it won’t be pretty.