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Slow bank run on Europe's banks

Friday, September 21 08:41:41

There's still a massive bank run going on in the euro zone that's threatening to tear the currency union apart. Over the past 12 months, some $425 billion in deposits have been pulled from banks in Greece, Italy, Portugal and Spain. And about $390 billion in deposits have piled up in core euro countries, particularly France and Germany.

The same happened in Ireland and the consequences are all too obvious with banks unwilling or unable to lend to businesses and mortgage applicants. The run on Irish banks has halted however although that money is only now trickling back into the banking system.

That might sound like a mundane bit of accounting. But it's potentially quite dire. And this slow bank run is a major reason why the crisis in the euro zone isn't likely to go away just yet. First, a rundown of why these deposits are shifting about in the first place. Imagine that you have tens of thousands of dollars stashed in a bank account in Greece. You keep reading Wonkblog and hearing that your country might get kicked out of the euro - in which case Greece would go back to using drachmas for currency. If that happened, your bank would forcibly convert all your saved euros to less-valuable drachmas, and you'd have a harder time affording imported goods or traveling abroad. That sounds unpleasant. So, one sensible thing to do is put all your euros in a German bank, for safekeeping.

As Bloomberg details, people have been doing this all across the euro zone on a breathtaking scale. Depositors in Spain, Italy, Portugal and Greece are all sending their money abroad. And this has all sorts of economic consequences.

For one, banks in these "periphery" countries now have to offer higher interest rates to entice depositors and get money. Some Greek banks now pay as much as 5 percent interest on their deposits. In turn, this means that Greek and Spanish banks have to charge higher interest rates on the money they lend. Businesses are paying more to borrow money. Those higher rates stifle economic activity and make it harder for countries like Spain and Italy to grow. Some banks in Spain, for instance, now face the risk of losing money on every mortgage they issue - which makes it tough for Spain's shattered housing market to recover.

The interest rate disparity is partially offset by the ECB purchasing State bonds which also drives down the borrowing costs of the banks however banks are still not lending to each other so the impact is not yet manifest on the street.