Once A Run On Banks Starts….

By: ispeculatornew
Date posted: 06.26.2012 (5:00 am) | Write a Comment  (1 Comment)

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There are many symptoms of the current European crisis. Some of the symptoms are also the causes in a very vicious cycle. The fact is that our whole system relies on confidence as I mentionned a week ago but also on a strong banking system. Why? Banks acquire money from central banks and depositors. They then put that money to use by lending money to small and bigger companies, to individuals, they invest money in the markets, help companies do merger & acquisition activity, etc. Without banks, there is no economy in much of the West. That is also why in the recent credit crisis (2008), the US and other governments had NO CHOICE but to rescue several banks. They did try not doing so with Lehman and it turned out to be a terrible mistake.

Europeans Banks In Big Trouble…First in Greece

A few months ago, some investors started worrying about Greek, about its possible departure from the Europe, about its never ending deficits, etc. That caused some investors to withdraw their funds from those Greek banks. Why? To avoid losing their money in the event that the bank goes default. Or having those Euros converted to Dragha in the event that Greek had to exit the Euro currency. That was a major problem of course but since Greece was so small, it wasn’t tackled seriously. Other European countries simply agreed to lend capital.

Then It Got Much Worse

Of course, when you hold money in a bank and you hear about friends or family taking their money out, you start to worry. Eventually, you also do the same, tell your friends about it, etc. And why wouldn’t you? There’s much more to lose by having your money in a Greek bank than having it an ultra-safe German one. The major issue started though when residents in the much bigger Spain and Italy started to feel the same way. Add to that the fact that Spanish banks have been known for holding very shaky real estate loans on their books for much more than they are worth and you can see how dozens of huge banks have been facing liquidity issues.

That is another vicious cycle. Once news starts reporting such liquidity issues, other banks stop issuing short term loans to those banks, more clients withdraw their funds, etc.

Where We Are Now

Even these days, the so-called peripheral banks are losing nearly $1B in deposits every day. You don’t need to be a rocket scientist to know that this spels major trouble. The countries involved such as Spain, italy and Greece do not have enough funds to bail out their own banks so they depend on international or European institutions in order to save their banks. Given the hundreds of billions required, it’s very much unclear how they will be able to get this done…

The Leverage Problem

US banks were highly leveraged in 2008 which made the problems much worse. Europeans banks though are even more leveraged so the issue of having a run of banks (which the US did not have to deal with in 2008) could become much more problematic.

No Easy Solution

A big part of the problem is that while Canadians and Americans have protection if their bank goes default, that is not so much the case in Europe. Since most of these countries are in a bit of a hole themselves, offering such a guarantee would be pointless. And it’s doubtful/improbable that a country like Germany would be willing to back such a measure…

It Will Only Get Worse

I don’t see any reason for someone to hold funds in such banks or transfer back. That will make life very difficult for those banks, for local businesses and the economy, making things even worse for those economies. At some point, we will see citizens being unable to withdraw their funds from their banks which will create panic…

It’s already very ugly and I think it will get much worse..what are your thoughts?

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1 Comment

  1. Comment by Hans — June 26, 2012 @ 7:21 pm

    The Euro, the EU is done, finished within the next three agonizing years..

    It was not meant to be and it will not stand..In fact, unless Europe rids itself of the Socialist model, it is doom with a Common Wealth or not.

    This has been tried before and all of them have failed; just as the Left has always failed to understand history, they themselves become perpetual future victims..

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