A spreading bank run could hasten Greece’s exit from the eurozone but it doesn’t have to end that way.
It is far less clear what the impact would be should the wave of withdrawals accelerate in other peripheral states such as Spain or Portugal, which are further from outright revolt over German-led austerity, and which, due to their sheer size, will enjoy a vastly improved negotiating position.
Greeks have been withdrawing hundreds of millions of euro of deposits, driven by a fear that a Greek exit from the euro will leave them holding less valuable new drachma.
That fear, though, is predicated on a shaky notion: That the players in the drama will do what they have said they would.
Greek depositors are worried their politicians will repudiate the terms of the bailout and that the ECB and European authorities will cut them off.
That would bring down the Greek banking system, or most of it, and force Greek authorities to impose capital controls. Cue Spanish, Italian, and Portuguese depositors, who might start to withdraw their own deposits, putting massive amounts of collateral into the hands of the ECB and their own central banks.
It comes down to whether you think European officials will stick with their principles or act in their own best interests — always a legitimate and uncertain question. The ECB could, at any point, pull the plug on the Greek banking system by refusing to accept the sort of bad collateral now being offered. A prudent but destructive act.
Greek depositors only have as much power as the ECB gives them. The simple answer is to take more bad collateral and keep negotiating. Even if the troika elects to punish Greece by stopping payments to it, there is nothing that would stop the ECB from carrying on providing liquidity to the Greek banking system. The amount of money involved is not huge, especially in proportion to the potential damage that would be caused by a bank run-caused exit from the euro.
That said, if things get worse in Greece, depositors elsewhere in the eurozone may withdraw money from banks in weaker countries.
More withdrawals will be no surprise. The opportunity cost of moving money is low, and even if the money is not deposited elsewhere, very low interest rates impose little penalty on cautious savers stuffing bank notes into mattresses.
The logic is even less strong for a bank run in Spain, for example, forcing a disorganised euro exit. So long as Spain is making minimal progress on reforms — and it is doing better than that now — there is even less incentive for the ECB to become spookedby a rush of questionable collateral onto its books.
And if Spanish bank funds flee, the maths will be the same for the ECB but the scale will be different and argues for forbearance rather than retribution. About one third of Greek deposits, €70bn, have left its system. Extrapolate that to the Spanish system and you are looking at over €500bn.
That could spook Germany and the ECB, but more likely would bring Europe into a de facto fiscal union, in which the affairs, credits, and debits of the players are so intertwined as to utterly resist detangling.
The ECB will not end the euro on its own authority, and in the event of a huge bank run it will probably prove impossible for politicians to make the decision to pull the plug quickly. That will leave the south owing the north more, but the north having less ability to collect or dodge. Some sort of common bond issuance or fiscal union might be hastened by a bank run.
None of this is to say that the ECB or eurozone authorities won’t become so exasperated with Greece that they pull the plug. The odds have narrowed, but we are not quite there yet.