Greek Contagion: Run on Banks Accelerating

For weeks, Greek citizens and companies have been pulling money out of Greek banks at alarming rates as fears rise that the island nation will exit the Euro in a chaotic fashion. This week, Spanish banks are seeing record withdrawals signaling that Greece’s failing economy is having disastrous effects in other EU nations.

It has been long expected that Greece would exit the Euro with disastrous effects on other financially weak EU member nations. The PIGS (Portugal, Ireland, Greece and Spain) have banking systems that are on the verge of a liquidity crisis and need only a nudge to go into default. It would appear they will be getting a shove from Greece that will cascade throughout the EU.

The partially-nationalized Spanish bank Bankia has seen its shares lose more than 25% of their value on a report that customers had withdrawn more than a billion Euros in a single week. This run on Spanish banks is an echo of the bank run going on Greece where customers withdrew more than $900 million on Monday and another $600 million on Tuesday. Experts say that even though some level of withdrawals has been occurring for years, the Greek and Spanish bank runs of late are indicative of panic.

In an effort to slow the outflow of cash, Spanish authorities have announced that customer’s deposits are safe and that there is no “run on the bank”. But, why wouldn’t there be?

Greece has failed to enact austerity measures required to receive additional bailouts from the EU. Greek voters chose socialist candidates that promised to end austerity and that the EU would come to their rescue anyway – something that is looking much less likely. This, along with heavy depositor withdrawals, leaves Greek banks without capital and unable to operate. Within days or weeks, the system will collapse if the EU does not dump billions into the tiny island nation.

Spanish banks are in similar trouble. Bankia, now taken over by the government, is swimming in highly-toxic assets after Spain’s real-estate market crashed in 2007-08. Although the government took over the bank, the asset bomb is so large that a country with as much sovereign debt as Spain cannot manage to bail it out. Considering the nation’s debt crisis, Spain has no choice but to borrow money at ever-increasing interest rates.

With a report coming out today that American manufacturing activity suffered a startling reversal, the pressure on the global economy may be that one straw for the oft mentioned camel.

Greece is set to fail, Spain is close behind and Italy will likely be the next big story as their citizens and companies accelerate withdrawals and expatriation of the money ahead of a euro crash.