Monday, December 1, 2014

Potential For Bank Runs Has Europe Preparing For The Worst

By Cornelius Nunev


Things may get worse before they get better in the European economic crisis, Reuters reports. The European Central Bank is pressuring for a combined guarantee on bank deposits across the euro zone, amid fears that bank runs will spread like wildfire as investors head for the hills. Top economic official of the European Commission Olli Rehn cautioned that without added financial discipline, Europe will go down into a financial chasm.

Fears with banks

Worries about whether Spain's banking system will fail and whether Greece will survive in the euro area at all have deflated the value of euro currency to a two-year low against the U.S. dollar. Looking for a comparatively safe investment, European speculators have funneled their cash into Austrian and French bonds, whose 10-year yields are at their low mark since the introduction of the euro.

Spanish banks moved massive amounts of cash abroad in March at a rate faster than has been recorded since record-keeping of such transactions started in 1990, notes the Associated Press. The country's fourth-largest lender, Bankia, reportedly was nationalized in May due to massive losses following a real estate crash. As much as $82 billion in net capital has been lost by Spanish banks in recent months.

Not giving the help requested

To be able to keep the European economy from getting even worse, there were rumors that there might be a Spanish bank bailout from IMF. This was denied by International Monetary Funding Managing Director Christine Lagarde.

"There is no such plan. We have not received any request to that effect and we are not doing any work in relation to any financial support," said Lagarde.

A referendum in Ireland would make it easier for the European Union to offer aid to Ireland voters, according to the New York Times. There is also an election in Greece on June 17 that will go a long ways towards to euro zone for the country. Right now, the bank bailout favoring New Democracy party is beating the SYRIZA leftists, which is a good thing for people who want bank bailouts.

A demand for clarity

The ECB will not write economic policy for the entire euro zone; European leaders have to figure out where the nations stand quickly, according to European Central Bank President Mario Draghi.

"We will avoid bank runs from solvent banks. Depositors' money will be protected if we build this European guaranteed deposit fund. This will assure that depositors will be protected," said Draghi.

Germany is well-known as a paymaster of the European Union and does not like the idea of a joint deposit guarantee for depositors that the ECB is pushing for. It is something German Chancellor Angela Merkel is not sure about. Germany has not been willing to put taxpayer dollars to the union in the past.

"There are integration steps which will require treaty changes. We are not at that stage today but nevertheless there are no taboos," she said at a news conference.

No warning required

The European economic crisis has brought on financiers to be really concerned at this time, according to Draghi. Unfortunately, that must not translate into caution.

"I urge all governments to keep this in mind, because it is better to err by too much in the very beginning rather than by too little," he said, citing the recent failures of Spain's Bankia and the French-Belgian bank Dexia.




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