Saturday, April 17, 2010

Mediterranean Rock?

Worrying about a Greek bank run

Banks in Greece are experiencing runs in the billions of euros. Remember, depositors can remove their money and redeposit in another country in another bank and still do business in the euro. There are sixteen countries in the euro zone. The banking options for euro zone citizens are varied and abundant. The bank deposit scheme in the euro zone leaves deposit guarantees in the hands of the national governments. In this case Greece is the guarantor. And since the country is in trouble because if its fiscal deficit issues, its banking system is also in trouble. That is because the strength of the national banks deposit guarantees are dependent on the strength of the government’s finances.

Posted by drewster @ 10:47 AM (2031 views)
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10 thoughts on “Mediterranean Rock?

  • Relevance to HPC: If everyone takes their money out of the banks, the banks have no money to lend in mortgages, so house prices fall.

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  • markj69 str05 says:

    Yahoo. So i’ll be able to buy a house in Greece!

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  • Who would want to buy a house in greece now, all foreign home owners are going to get taxed to death

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  • Slightly odd piece in that it seems to miss the elephant in the room..

    Greece could leave the euro. Ohio – or any other US state for that matter – cannot leave the dollar.

    People will not moving be moving funds from Greek banks because they are worried about deposit insurance, they will be moving them because they fear Greece will be forced to leave the eurozone, with an immediate sharp devaluation as it does so.

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  • If Greece did leave the euro, would it really solve their problems? Their national debt would still be denominated in euros (or would it?). Individuals’ debts to the banks would presumably be denominated in drachma, but equally anybody with savings would also see their wealth converted to devalued drachma. All that happens is a redistribution of wealth from savers to debtors; on a national scale the problems still remain.

    Besides, who would lend money to a newly-devalued Greece? What interest rate would you be willing to accept on a drachma bond?

    Greece’s simple problem is that the country spends more than it earns. Are Greek civil servants, teachers, pensioners, etc. so dumb that they vociferously oppose nominal pay cuts in euros but would gladly accept real pay cuts in drachma?

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  • I feel sorry for the Greeks.
    They get European tourists imposing their ‘I am the music man’ culture on their land, buting their property and raising the cost of living for them and forcing them to work 2 jobs.
    Then, when their economy naturally has problems, the Europeans are saying how silly those Greeks are.
    Just my 2 euros…

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  • mdmick,

    I’m not so sure that’s how it works. Foreign property purchase is only inflationary when supply is constrained. From what I’ve seen of Greece, there doesn’t seem to be much in the way of planning control; if a foreigner buys one house, the locals just build another. Same story in Spain – they now have a glut of housing in the touristy areas.

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  • tenant super says:

    drewster @ 4 “Are Greek civil servants, teachers, pensioners, etc. so dumb that they vociferously oppose nominal pay cuts in euros but would gladly accept real pay cuts in drachma?”

    Yes, they are. Not just Greeks but people generally. I can’t remember where I recently read a research piece reporting that people would be happier with a 2% pay rise when inflation is running at 5% (i.e. a paycut) than a pay freeze when inflation is 0% . You don’t have to go very far (try reading some of the discussion boards on places like netmums or some of the online tabloids) to realise just how economically illiterate the vast majority of people are. You see comments which really make me wonder whether humanity has a future …like “it doesn’t matter if sterling crashes if we’re paid in pounds and don’t go abroad”.

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  • Drewster,

    If Greece left the euro, all Greek sovereign debt would be re-denominated in the new currency, as would all savings and loans in/from Greek banks. The Greek govt could meet its budget deficit in the short term by printing more cash, therby devaluing the currency.

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