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As bank deposits flow from Greece to
Switzerland, the odds of another crisis flare-up in Europe look assured.
"Follow the money" is an old
and wise adage. To understand what's happening in Europe -- and why there is
more trouble ahead -- we can follow the money literally.
I'm talking specifically about
depositor money in banks. As the WSJ reported last week:
Greece's worsening slump is
threatening to compound another risk for the country: the steady withdrawal
of money from Greek banks.
In the last 20 months, the country's
banks have suffered an unprecedented withdrawal of customer deposits. Tens of
thousands of Greeks -- from the well-heeled to the less well-off -- have
moved their savings out of the country or stashed the cash in safe-deposit
boxes or under a mattress, bankers say...
As the Greek banks lose deposits, they
also lose liquidity. This makes it even harder to lend, in an economy gripped by deep recession.
According to the Greek central bank, a
third of the funds withdrawn have gone abroad. One could safely consider that
a low-end estimate, as the central bank has reason to be conservative. The
higher the percentage of funds flowing across borders, the worse things look.
Why are Greeks pulling cash from the
banks? Because they don't know what will happen to the banks... or to the
country in general. Greece has lost control of its fiscal fate. The terms of
a Greek bailout, previously thought settled, have been upended again by
demands for collateral.
Following the money further: While
Greek banks can't hold on to cash, Swiss banks are seeing too much cash.
Via Marketwatch:
[Swiss bank UBS] said it may shortly
begin to levy a temporary charge on Swiss franc deposits as a way of
encouraging its bank customers to keep their cash in the surging Swiss
currency as low as possible.
The bank said in a statement
distributed by Swift earlier Friday that "in view of the prevailing
market conditions which in particular affect the Swiss franc, we are closely
monitoring the development of the CHF cash balances maintained in current
accounts of our CHF cash clearing customers."
The Swiss have been here before. In
the 1970s the Swiss National Bank (SNB) imposed "negative" interest
rates, meaning holders of Swiss francs had to pay a charge to stay in the
currency.
Now the futures markets -- where
currency contracts trade on forward months -- are predicting
"negative" rate conditions until 2013! It is "Alice in
Wonderland economics," writes Gillian Tett of
the Financial Times.
The strength of the franc is a major
burden for Switzerland as a country.
When a currency shoots up in value for
artificial reasons -- because of buying pressure not related to exports --
the export sector of the country suffers. Swiss goods and services become
less competitive on the world market. Traveling to Switzerland becomes cartoonishly expensive (due to out-of-whack exchange
rates). Over time, the result can be recession and deflation.
Money keeps flowing out of places like
Greece, and into places like Switzerland, because of uncertainty and ongoing crisis. European banks are dancing on the edge
of a precipice. The eurozone experiment is headed
for crack-up. And Europe's leaders show no sign of averting disaster.
Take German Chancellor Angela Merkel
for example. In a political speech on Friday, Merkel accused the financial
markets of "trying to blackmail states," encouraging
"countries that are highly indebted to really do their homework and get
their debt down."
And as for euro bonds, Merkel adds:
"That's where we have to put up a clear stop sign and say we won't do
that."
In Germany's
terrible choice, we wrote of how Germany had to embrace a
wide-scale solution like euro bonds, or risk letting the whole euro currency
project break apart.
With euro
bonds so firmly off the table, the internal health of European banks unknown,
and bailout agreements coming under new pressure, it is only a matter of time
before a new crisis wave comes barreling out of
Europe. Stay prepared.
Justice
Litle
Taipan
Publishing Group
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