Tuesday, May 15, 2012

Run on the Greek banks begins in earnest

The Telegraph reports that the run on the Greek banks has accelerated.

Karolos Papoulias, the Greek president, warned party leaders that their continued failure to agree was risking “fatal consequences”. 
Citing a secret government document, he said Greeks were already pulling £80 million a day out of the country’s banks. Almost €1 billion (£795 million) has been withdrawn since the last elections on May 6. 
“The extension of political instability will lead to fatal consequences. The absence of government is a serious risk to the financial security of the Greek people and our national existence,” the president was reported as saying. 
Mr Papoulias said he had been warned by the central bank and finance ministry that the country faced “the risk of a collapse of the banking system if withdrawals of deposits from banks continue due to the insecurity of the citizens generated by the political situation”. 
Some economists have suggested that a euro exit could be done in an orderly way by closing Greek banks while the country prepares to reissue the drachma. Costas Simitis, a former prime minister, said that would spark panic, warning that Greeks would rush to withdraw money from banks. “If they close more than three days there will be a bank run,” he said. 
This reaction by Greek depositors is completely predictable.  Deposits stay put so long as the depositor thinks that the government will ensure the depositor can get their money back.  Depositors run to the bank to withdraw their money if they think they might only get 50% of their money back.
A report in Germany’s Wirtschaft Woche magazine forecast that a Greek bankruptcy and exit from the euro would cost the governments of the single currency’s 17 members £240 billion, pushing the eurozone and European economy into a crisis not seen since the 1930s.
My question is why anyone believes that the run on the Greek banks will stop in Greece and not spread immediately to say Spain, Italy, Portugal and Ireland?  There is no chance that those countries economies will not be seriously hurt if the collapse of the Greek economy results in a recession in the EU.

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