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[Barron]

Massive ECB intervention looming

2012-MAY-17

Currency quotes The slow-motion Greek bank run is on – or as Paul Krugman calls it, a “bank jog”. The NYT columnist sums up the state of play in Greece:

“What’s happening now is a “bank jog” — Greeks are pulling euro deposits out of banks fairly rapidly, but not quite fast enough to be called a bank run.

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 it’s hard to see how they can be restored to operation except by ditching the euro and using something else.

And if that happens, surely depositors in other European countries will start their own bank jogs …”

In other words, we are reaching the point where a massive dose of debt monetisation by the ECB is all that can prevent a complete collapse of the Greek banking system, and Greece leaving the euro. Is the state of play yet dire enough that the hawks at the Bundesbank will acquiesce to this?

It seems likely. For one thing – as Ambrose Evans-Pritchard reports – some estimate that the loss to the German state resulting from a ‘Grexit’ could be as high as 89.8 billion euros. The chaos at financial markets could dwarf anything we saw after the “Lehman weekend” in September 2008. And as Ambrose also notes, there will huge international pressure on the EU from the US, China, Japan, IMF et al to do “whatever it takes” to stop the contagion spreading across the global banking system.

How might precious metal prices react to QE from the ECB? It should be bullish, as it will underscore the extent to which the financial system is now totally dependent on ever-increasing doses of money printing. It could also, ironically, result in improved euro performance at currency markets, if it results in greater stability in the eurozone and heads of the threat of bank runs.

[geoff01]

And now some of the Spanish banks are seeing big withdrawals as people take fright.