Bank run

Since the beginning of this week, Greeks have pulled a staggering amount of money out of their savings accounts at the country's banks. There has yet to be a bona fide run on the banks, but financial experts say Greek banks have been hemorrhaging money lately at the rate of one billion euros a day.

"When you consider the entire financial state of Greek banks, then this is dramatic," says economist Dirk Schiereck from Germany's Technical University in Dortmund. Over the last two years, Greek bank customers have withdrawn some 45 billion euros from savings accounts. "This trend has accelerated in the last several weeks," notes Schiereck.

Transparency lacking

Should this situation get worse the Greek banking system could collapse within a few days. Banks, as a rule, only have a small portion of customer savings on hand to meet normal demand for cash. The rest is invested, or given to customers as loans so the banks can earn interest.

"When a lot of people withdraw their savings, however, banks end up with a financial gap which they have to cover," explains Schiereck. Normally, a bank could go to the central bank and borrow funds to cover its obligations, but in the case of Greece, the central bank in Athens itself does not possess the funds to fend off a run on the country's banks. "There is an acute danger that the banks would become insolvent and collapse," warns Schereck.

Just how much money Greek banks have at their disposal to pay customers is not known. "This information is apparently being withheld intentionally," says Hans-Peter Burghof, an economist at the University of Hohenheim in Germany.

The fact is that the savings of the Greek people as a whole far outstrips the funds available to the European Union's emergency financial rescue fund (EFSF). The 18 billion euros in the EFSF are a drop in the bucket compared to the estimated 140 billion euros parked in Greek savings accounts.

For Hans-Peter Burghof it is perfectly logical that Greeks are withdrawing more and more savings in light of the ongoing discussions about a eurozone exit and return to the drachma. A real run on the banks, however, can depend on even marginal occurrences, warns Burghof. "That is a process which can happen very quickly, triggered by, say, an inappropriate comment from a politician," he says.

Little room to maneuver

In a worst case scenario, a government can declare a moratorium and prohibit bank withdrawals, notes Burghof. Afterwards, banks could allow customers a fixed amount per week. "But you just cannot let things go and have a bank-run play out," Burghof says. The announcement of a moratorium alone would be devastating to Greece's credibility," he added.

Runs on discredited banks have occurred from time to time in the past, such as on the English bank Northern Rock, or Bawag of Austria. In most cases, the nationalization of the bank preserved customers from losing their shirts. However, there is little precedent for a widespread run on all of a country's banks, as could happen in Greece, with the possible exception of Argentina's financial crisis at the turn of the millennium, or the great Wall Street crash of 1929. In both those cases, bank customers lost almost everything they had.

Bankruptcy of the Greek banking system could be expensive for Germany, notes Burghof. If the EU sticks to its guns to save the eurozone, it could end up costing just about anything, he warns.

Even without European support, Dirk Schiereck sees an extensive financial burden coming the EU's way: "Many European banks own bonds and equity in Greek banks. A collapse of Greek banks could unleash a domino effect," bringing down otherwise healthy financial institutions.

Author: Nicolas Martin /gb
Editor: Jane McIntosh