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Euro Zone Battle Hinges On Greece’s Banks: Steil

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Amid worries that Greece might ditch the euro after its upcoming election, the telltale sign of such a move will likely come much sooner, Benn Steil of the Council on Foreign Relations said Wednesday.

Greek residents are already voting — with their money, he said on CNBC’s “ The Kudlow Report .”

“Bank deposits have been flooding out of the country, into Germany,” said Steil, CFR senior fellow and director of international economics. “If the capital flight accelerates, this will force the hand of the caretaker Greek government. They may be obliged to introduce the drachma even before the June 17 election, just in order to keep the banking system afloat.”

Greece’s lack of a Federal Deposit Insurance Corporation equivalent to back bank customers’ cash could mean trouble.

“The Bank of Greece still does exist, and they’ve been allowed by the ECB to print euros over the past two months,” Steil said.

“And indeed it’s been estimated that they’ve printed about 100 billion euros worth, but the ECB is going to pull the plug if it looks like those Greek banks are actually insolvent rather than illiquid,” he added. “And we’re getting very near that.”

Earlier, Reuters quoted three euro zone sources as saying that member countries will have to prepare a contingency plan for the eventuality of Greece leaving the single currency.

But even before voters head to the polls, Greece’s efforts to prevent a full-on bank run will be crucial.

“If they are committed to keeping their money in the banks, they probably won’t vote for the radical party in the June 17 election,” he said, adding that the opposite scenario could trigger a domino effect.

“If they do pull their money out, then watch out because the front lines of the battle to save the euro zone moves on to Spain, to Italy, to Portugal, to Ireland.”

If that happens, attempts at austerity could disappear.

“We’ll forget about the austerity program,” he said. “Everybody will forget about Greece very quickly.”

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