Ángel de la Peña, a Spanish government worker, is seriously considering the once unthinkable: converting some of his savings from euros to British pounds.
Alvaro Saavedra Lopez, a senior executive for I.B.M. in Spain, says many of his corporate counterparts across the country are similarly looking for safer havens by transferring their spare cash to stronger euro zone countries like Germany “on a daily basis.”
It is only a trickle so far, and not nearly enough to constitute a classic bank run. But these growing transfers of deposits out of troubled Spanish banks reflect a broader fear that the country’s problems could make it hard for Spaniards to get to their money if banks fail and cannot be supported by the government. In a worst case, some even worry their money will be worth substantially less if Spain is forced to leave the euro currency zone and re-adopt its old currency, the peseta.
Money already has been pouring out of banks in Greece, where many citizens believe it is increasingly likely that their country will be forced to leave the euro zone. But for European policy makers and economists, the possibility of mini-runs on banks spreading from Greece to other, bigger countries like Spain — with 1 trillion euros, or $1.25 trillion, in bank deposits — poses a much more serious risk.
Indeed, the outflow of money from Spanish banks could increase if the ratings agency Standard & Poor’s, as expected, downgrades Spanish banks, in effect saying that their weakened state makes them riskier.
The havoc that a stampede might cause to the Continent’s financial system would greatly complicate efforts by European Union officials to fashion a longer-term plan to ease the debt crisis and revive Europe’s economy, because authorities would have to cope with the staggering added costs of shoring up banks.
“A bank run can happen very quickly,” said Matt King, an expert on international fund flows in London for Citigroup. “You are fine the night before, but on the morning after it’s too late.” It was a similar liquidity crisis on Wall Street in September 2008 — which started with nervous investors pulling money from troubled institutions, then quickly from healthier ones — that set off the financial crisis.
In Greece, more than two years into its financial crisis, nearly one-third of the country’s bank deposits have already left the country.
Could There Be A Bank Run In Spain?
There has been no such exodus in Spain so far, where over the last year about 4.3 percent of bank deposits, or 41 billion euros, the equivalent of about $51 billion, has been transferred out of the country. But that amount is in addition to a decline of 140 billion euros in foreign-owned financial assets in the last year, like the sale by foreigners of Spanish government bonds.
The trend worries European officials. At an informal meeting of European Union leaders on Wednesday in Brussels, Italy and some other countries began pushing a proposal to increase confidence in banks — and stem withdrawals — by creating a regionwide deposit insurance system to buffer account holders against banking collapses, similar to Federal Deposit Insurance Corporation in the United States. It is especially a concern for Spain, where the national deposit insurance fund is virtually bankrupt.
What is more, the condition of Spanish banks is expected to worsen over the next year as commercial real estate and mortgage losses, a big source of the nation’s bank troubles, continue to mount.
So far there is little sign that specific plans for a Europe-wide deposit fund are imminent. But officials in Brussels say the idea, along with the more controversial question of issuing euro bonds backed by the credit of all euro zone members, will be discussed in more detail next month when the European Union leaders hold their next formal meeting.
The idea of euro zone-wide deposit insurance has been around for a long time, but it faces the obvious political hurdle of German taxpayer resistance to backing 2.8 trillion euros worth of deposits in risky countries like Spain and Italy, as well as those that have already been bailed out — Greece, Ireland and Portugal.
In a recent report, Mr. King, the Citigroup analyst, highlighted how the flight of money held by foreigners presaged broader bank crises in Ireland and Greece before those countries required European bailouts. Italy, too, is now nervous about the sudden exodus of 220 billion euros in foreign money over the last year.
Such hot-money flows are not unusual and do not always signify a similar migration of domestic money. But Mr. King pointed out that if these foreign runs began to approach the levels reached in Ireland and Greece, where more than half of foreign bank deposits and a third of bond holdings exited those countries before they were bailed out, Spain and Italy could have their own banking tailspins.
At their essence, bank runs are a fear-driven phenomenon. Once they start, they are difficult to stem.
Bank Runs Are Not The Only Worry
The less damaging versions occur when money stays in the country, but moves from weaker institutions to stronger ones. This was the case in Britain in 2007, when many depositors who feared losing their money at the regional bank Northern Rock moved their funds to the international giant HSBC, hastening Northern Rock’s need to be bailed out by the government. Such deposit migration is now happening in Spain as people move money from weak savings banks, called cajas, to stronger institutions with international reach, like Santander.
More devastating to an economy is when cash leaves the country en masse, as occurred in Argentina in 2001. The government imposed capital controls, making it illegal to transfer money abroad. Mass money emigration is now taking place in Greece, where, under euro zone rules, it would be illegal to impose capital controls.
One indicator of money flow trends is what happens to corporate banking deposits. Corporate deposits tend to be much smaller than consumer bank savings. But because company treasurers tend to be more sophisticated when it comes assessing financial risk, they tend to withdraw money more quickly when they perceive a bank might be troubled than individual depositors do.
In Greece, for example, corporate deposits have been fleeing much faster — by 27 percent over the last 12 months, compared to 15 percent for consumer deposits.
By this measure, the professional money is fleeing Spain, too, at a much faster pace compared with consumer funds. The country’s 721 billion euros ($907 billion) in individual deposits is down only 1.4 percent for the year. But corporate deposits have exited at a rate of 14 percent, shrinking to 190 billion euros ($239 billion) during that period, according to Goldman Sachs.
While many Spanish consumers may still be trusting the government to protect their money — perhaps not realizing that the country’s Deposit Guarantee Fund has been depleted and now exists mainly in name only — the in-the-know money is heading for the border at an increasingly brisk pace.
“If confidence in the Spanish banking sector falls any further, the possibility of panic and a bank run becomes very real,” said Mr. Saavedra of I.B.M., who leads the banking risk management practice at the software group in Spain.
Analysts sound a further note of caution. Because the official deposit data for Spain is current only through March, the figures do not reflect anxieties about the deepening political crisis in Greece since the May 6 elections.
Nor do the deposit data yet track what has happened since the Spanish government nationalized Bankia, the country’s largest property lender, in the following days. Cleaning up Bankia’s mortgage mess will cost at least 9 billion euros, Luis de Guindos, Spain’s economy minister, warned Wednesday.
And clearly, some consumers are now picking up on the warning signals. Mr. de la Peña, the civil servant in Madrid, said that he had recently transferred 80,000 euros, essentially his life savings, from Ibercaja, one of Spain’s savings banks, to Santander.
But now, with daily news reports on the prospect of Greece’s possible departure from the euro currency union, he is seriously considering converting his nest egg to British pounds.
“I’m exasperated because the situation changes every day,” he said. “But what is certain is that if Greece now leaves, it’s going to be one huge and bloody chaos.”