Paul Krugman and the coming European bank runs

Regular readers know that this blog has been tracking bank runs in Ireland, Greece and Spain.  Each of these runs has been triggered first by insolvency of the banks and then, the recognition that the sovereign was unlikely to be able to honor its deposit guarantee.

In his NY Times blog, Professor Krugman suggests a twist on how this will play out for Italian and then French banks.

At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France.

The twist is that the deposit guarantee will not be honored with euros, but rather with new lira.