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Sunday, May 20, 2012

Greece and Spain fear panic runs on banks



An article in Der Spiegel notes that both Spain and Greece are worried about panic withdrawal of funds from banks. The Spanish government just recently has denied that one billion Euros was withdrawn from the major bank Bankia last week alone.

Moody's downgraded ratings on sixteen Spanish banks. Greeks who fear that the Euro might eventually be replaced by the Drachma are withdrawing hundreds of millions of Euros from their accounts. In Italy too the banks are under pressure as Moody's also downgraded a total of 26 Italian banks.

. The Spanish central bank has admitted that the proportion of bad loans in banks is at an 18 year high. Bad loans make up 8.36 per cent of loans in March up from 8.15 per cent a month earlier. No doubt the rate is even higher by now.

Some financial experts are calling for intervention by the European Central Bank before a surge of withdrawals increases. A sovereign debt analyst said:. "Once a bank run begins, it is very hard to stop without a credible deposit guarantee," "Given the fragile fiscal position of Spain, the European Central Bank is under increasing pressure to step in to calm depositors' nerves."

However the ECB has already provided banks cheap three year loans as part of the LTROs (Longer Term Refinancing Operations). Banks have borrowed almost one trillion Euros through this program. But banks are running out of assets to back those loans. If they lose deposits this will make the situation even worse. For much more see the full article.

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