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A (very) simple analysis of the run on Greece’s banks

by: (Course Director - Governance, Risk & Compliance) on

The Greek situation could be leading to another crisis for the Eurozone – according to some commentators. There are queues for money being reported in the media, so it may feel a bit like another ‘Northern Rock’ situation. But is it?

Are there any similarities between the run on the UK bank and the Greek government’s decision to impose a mandatory bank holiday until Monday July 6?

Northern RockThe Northern Rock situation was precipitated by the global credit crunch as the firm was unable to raise cash through its usual channel of the wholesale money market, because of fears over its exposure to sub-prime debt. Its operating model needed the wholesale money market to provide liquidity finance on an ongoing basis and when this source of funds disappeared, savers and depositors were concerned that their investments were unsafe and clamoured to withdraw all their money.

The situation for Greek banks is similar in only one respect – the banks are facing massive demand for withdrawals, straining their liquid reserves to the limit. Hence imposing the €60 per day ATM limit on domestic bank account holders.
But the underlying reasons are vastly different.

GreeceThe Greek economy is crippled by massive amounts of debt, and the country has been bailed out by the EU and the IMF. These loans are now repayable in order to secure further funding support and the government has been either unable or unwilling to reach a sustainable agreement with its creditors over these repayments.

All this has dented the confidence of the population in the economy, and banks are part of the economy. So, the demand for withdrawal has increased dramatically as the people seek to either liquidise their savings and investments, or to transfer it abroad to ‘safer’ countries which are not threatened by the prospect of default.

So, no, the situation is not the same.

In fact, the differences are enormous, and politics and economics on a macro scale are involved. But to the average TV viewer, and probably the Greek on the streets of Athens, it DOES means the same thing: ‘my money is not safe. I want it back, and I want it back now.’

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