by Michael Snyder
May 16, 2012
We Are Watching The Greek Banking System
Die Right In Front of Our Eyes
Money is being pulled out of Greek banks at an alarming rate, and if
something dramatic is not done quickly Greek banks are going to start
dropping like flies.
detailed yesterday, people do not want to
be stuck with Euros in Greek banks when Greece leaves the euro and converts
back to the drachma. The fear is that all existing Euros in Greek banks
would be converted over to drachmas which would then rapidly lose value
after the transition.
So right now Euros are being pulled out of Greek
banks at a staggering pace.
According to MSNBC, Greeks
withdrew $894 million from Greek banks on
Monday alone and a similar amount was withdrawn on Tuesday. But this is just
an acceleration of a trend that has been going on for a couple of years. It
has been reported that approximately a third of all Greek bank deposits were
withdrawn between January 2010 and March 2012.
So where has all of the cash for these
withdrawals been coming from? Well, the European Central Bank has been
providing liquidity for Greek banks, but now it has been reported that the
ECB is going to
stop providing liquidity to some Greek
banks. It was not announced which Greek banks are being cut off.
For now, the Greek Central Bank will continue to
provide Euros to those banks, but the Greek Central Bank will not be able to
funnel Euros into insolvent banks indefinitely.
This is a major move by the European Central Bank, and it is going to shake
confidence in the Greek banking system even more.
There are already rumors that the Greek government is considering placing
limits on bank withdrawals, and many Greeks will be tempted to go grab their
money while they still can.
Once strict currency controls are put in place, the population is likely to
respond very angrily. If people can't get their money there is no telling
what they might do.
We are reaching a critical moment. Many fear that a full-blown "bank panic"
could happen at any time.
The following is from a
recent Forbes article...
The pressing problem isn't a splintered
legislature that may balk at delivering the reforms that the IMF and
European Community are demanding in exchange for the next tranche of
It's a disastrous, old-fashioned run-on-the
"For a year, Greeks have been sending
their savings from Greek banks to foreign banks," says Robert Aliber,
retired professor of international economics from the University of
"Now, the flood has reached a
Indeed on Monday alone, outflows from the
Greek banks reached almost $900 million.
These banks would have collapsed already if not
for the support of the European Central Bank and the Greek Central Bank.
This was described in
a recent blog post by Paul Krugman
of the New York Times...
But where are the Euros coming from?
Basically, banks are borrowing them from the
Greek central bank, which in turn must borrow them from the European
Central Bank. The question then becomes how far the ECB is willing to go
here; is it willing, in effect, to lend enough money to buy up the
entire balance sheet of the Greek banking sector, given the likelihood
that this sector will be left insolvent by Greek default?
Yet if the ECB says no more, Greek banks stop operating - and itís hard
to see how they can be restored to operation except by ditching the euro
and using something else.
That is why the announcement that the ECB is
cutting off funding was so dramatic. The ECB is starting to pull back and
that is a very bad sign for the Greek banking system.
For the moment, the Greek Central Bank is continuing to support the Greek
banks that the European Central Bank is no longer providing liquidity for.
A Reuters article explained
how this works...
The ECB only conducts its refinancing
operations with solvent banks. Banks which fail to meet strict ECB rules
but are deemed solvent by the national central bank (NCB) concerned can
nonetheless go to their NCB for emergency liquidity assistance (ELA).
But this emergency liquidity assistance is not
intended to be a long-term solution as a recent Wall Street Journal
The ECB's emergency-lending facility isn't
intended as a long-term fix. National central banks must get approval
each month that they want to let their banks access the facility from
the ECB's governing council, which can veto use of the program.
If Greece installs an antibailout government that reneges on its
austerity promises, it would almost certainly be cut off from ECB
The truth is that we are heading for a financial
tragedy in Greece. If the flow of money out of Greek banks intensifies, the
Greek banking system might not even be able to make it to the next election
This point was underscored
in an article that was authored by renowned
financial journalist Ambrose Evans-Pritchard...
Steen Jakobsen from Danske Bank said
outflows are becoming unstoppable, not helped by open talk in EU circles
of 'technical' plans for Greek withdrawal.
"This has a self-fulfilling prophecy
built into it and I donít think we can get to June. The fuse is
burning and the only two options now are a controlled explosion
where Germany steps in to ensure an orderly exit, or an uncontrolled
explosion," he said.
So what should we expect to see next?
Well, James Carney of CNBC says that he believes that
it is inevitable that Greece is going to
have to implement currency controls in order to slow the bleeding...
It looks increasingly likely that Greece
will have to implement controls to prevent capital flight and a banking
collapse. To my mind, the only real question is when this will occur.
The widespread talk about Greece possibly leaving the euro zone is
likely to trigger withdrawal of bank deposits and other financial
assets, by those who fear they might be redenominated into a drachma
that would be worth far less than the euro.
The Greek government may soon announce a limit
on the amount of money that can be withdrawn on a single day.
The Greek government may also soon announce a limit on the amount of money
that can be moved out of the country. Those would be dramatic steps to take,
but if nothing is done we are likely to watch the Greek banking system die
right in front of our eyes.
Greek exit from the euro seems more likely
with each passing day. Such an exit would have a devastating impact on the
Greek economy, but it would also dramatically affect the rest of the globe
The following is from
a recent article by Louise Armitstead...
The Institute of International Finance has
estimated that the global cost of a Greek exit could hit Ä1trillion.
When Argentina defaulted in 2001, foreign debtors lost around 70pc of
That is a big hit for such a little country.
So what would it cost the globe if Spain or Italy left the Eurozone?
That is something to think about.
Meanwhile, the United States continues to steamroll down the same road that
Greece has gone. According to the Republican Senate Budget Committee, the
U.S. government is currently spending more money per person than Greece,
Portugal, Italy or Spain does.
spending ourselves into oblivion, and we
are heading for a national financial disaster.
Unfortunately, most Americans are totally oblivious to all of this. Instead
of getting educated about the horrific financial crisis heading our way,
most Americans would rather read about why Jennifer Lopez is
leaving American Idol...
But those that are listening to the warnings will be prepared when
the storm hits.
Things in Europe look really, really bad.
You better get prepared while you still can.