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Beware of Greeks Bearing Debts
Greeks to Vote Twice: With Ballots, but First with Banks

European negotiations over the Greek crisis have broken down for seemingly the umpteenth time, and Greek Prime Minister Alexis Tsirpas has called for a referendum to be held on July 5, five days after the June 30 deadline for the current bailout extensions. But will the Greeks even make it that far? As Bloomberg reports, the slow-motion bank run we’ve been covering since January has accelerated rapidly:

Two senior Greek retail bank executives said as many as 500 of the country’s more than 7,000 ATMs had run out of cash as of Saturday morning, and that some lenders may not be able to open on Monday unless there was an emergency liquidity injection from the Bank of Greece. A central bank spokesman said it was making efforts to supply money to the system.

Some banks were placing limits in daily bank note and ATM transactions. Yiota Kardogianni, a manager at a branch of Piraeus Bank SA, said cash withdrawals were limited at 3,000 euros ($3,350) daily and ATM withdrawals at 600 euros. Alpha Bank AE had set a daily limit of 5,000 euros for most of its branches since last week.

As we’ve written before, the first rule of a bank panic is, don’t panic; but the second rule is, if there is a bank panic, panic first. It appears more and more Greeks are getting that idea.

As a result, the Greeks will essentially have two referenda—the formal one, on the bailout proposal, but also an informal one, on the soundness of their banking system, cast with ATM cards and withdrawal slips. That one will come first. If enough depositors withdraw cash by Monday, or next week, to trigger capital controls (which, as we’ve noted, are hard to undo), the referendum may well be rendered moot.

We’ll have to see how the politics work out, but it’s looking as if the political system in Greece is on the edge of revolutionary change. If the people back Tsipras in the referendum and spurn the EU conditions, then he’ll have a mandate for radical measures in the chaos and bitterness that will almost certainly ensue.
Meanwhile, tourists among our readership may well want to start getting out of the country. If currency controls or bank panics or both ensue, it’s not clear whether credit cards will be processed. There could well be strikes at airports, among taxi drivers, and among public workers, including customs and passport officials. WRM was once stuck for several days on the Macedonian border when a strike closed Greek border posts. Nobody crossed the border until their demands were met.
And don’t delay. Outbound flights will fill up fast. (A ferry to Italy might be an excellent choice. We have an intern at TAI who’s there on vacation, to whom we’ve passed on the same advice.)
Of course, it could all fizzle out (as cartoonist Matt has noticed over at The Telegraph, every day has been doomsday in Greece for a while now), but the Greeks are really running out of room. It’s hard to see how the ECB can continue aid to the banks after this. After all the talk by politicians, things really may be decided by ordinary Greeks after all. Just not the way their Prime Minister had in mind.
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  • Anthony

    “Beginning in late 2009 and steadily intensifying thereafter, the European Union was shaken by a financial crisis that has threatened the future of the euro as a currency and the EU as an institutional framework for promoting peace and economic growth. At the center of the crisis lay the inability of certain EU countries, in particular Greece…, to repay the sizable sovereign debt…accumulated….”

    Francis Fukuyama in his Political Order And Political Decay provides excellent background data to root of problem in Greece today; clientelistic organization, low trust society, low quality government, history, and Greek politics (“and today as it struggles with its financial crisis, the central issue in Greek politics remain resentment of the influence of Brussels, Germany, the International Monetary Fund, and other external actors which are seen as pulling strings behind the back of a weak Greek government”) are a few examples he highlights.

  • wigwag

    Do you think that depositors in Spain, Portugal and even Italy might be wondering if this could happen to their banks? What about the Maltese, Lithuanians, Latvians, Slovakians and even the Slovenes?

    Isnt there at least a small possibility that a bank run in Greece will inspire a similar run on the banks in some of the other financially weaker states in the EU?

    While the risk might not be great, the consequences could be calimitous for the entire world economy, including the American economy.

    When the Fed made the decision to let Lehman Brothers fail to demonstrate the consequences of moral hazard, it never anticipated that their decision would lead to a cascade of events that very nearly wrecked the world economy. How certain should we be that a bank failure in Greece won’t lead to a similar cascade of devastation?

    It is really too bad that in the aftermath of the Second World War the victorious allies didn’t eviscerate Germany as a nation state. Germany has been a purveyor of disaster for Europe for over a century and it just keeps on ruining Europe with every move it makes. As a country, the most apt term to describe it is repulsive.

    Is the problem in Greece all Germany’s fault? Of course not.

    Does it share much of the blame? Unquestionably.

    One thing is clear; the European Central Bank and the German Government are playing with fire with its indifferent attitude about a bank run in Greece.

    I hope that Americans don’t get burned in the process.

    • Anthony

      WigWag, your commentary brings to mind “will the discontented peoples of Europe be willing for a generation to come so to order their lives that an appreciable part of their daily produce may be available to meet foreign payment”.

  • ljgude

    The structural flaw – the single currency with only partial integration of notional sovereignty makes the EU vulnerable to disintegration over different national cultures and economic situations in a way that an overspending sate like Illinois or a city like Detroit do not threaten the US. Britain’s staying out of the currency union seems like it was the best course of action. As for Greece, it is broke and can’t pay the debt back. Personally. I cynically think the EU will find some delusional way to put off the inevitable, but I think that they would better off putting their energy into managing the Grexit in a way that minimizes the impact on Greece and isolates the infection. When the Drachma returns i will go to a Greek restaurant and raise a glass of ouzo in celebration.

  • Ellen

    Europe is destined for a long, gradual economic decline which began overtly in 2008. If you look at statistics, that was the peak year for EU GNP and GNP per capita. Since then most countries in Europe have gone down or stayed the same, with the exception of a few small ones like the Scandi countries. Grexit will most likely hasten the decline of Europe, but it is a symptom not the cause of it all. To reduce the threat to other economies, like the US, the solution is to get out of European assets.

    Even 10 years ago, that would have seemed like a difficult prospect because the EU economy used to be a significant chunk of the overall world economy, with Euro companies invested in other companies and banks all over the world. People may not remember, there was a time in the 20th century when Europe produced 45% of the total GNP of the world, and a large portion of the most technologically sophisticated products. The rest came mainly from the US.

    Happily, that is not the case anymore. With a few exceptions (aircraft, some pharmaceuticals, German machine tools, and Swiss cuckoo clocks), there are few products or technologies anymore that are exclusively made in Europe. What there are, are historic trading relationships that are not that easy to break up. But, that is happening faster than people think, because Europeans produce less of what people want to buy and have less money to buy what others produce. Look at European imports and exports to any country in the world and you will see a declining trend across the board, if you value it in constant dollars.

    I have studied the trading data between Europe and Israel, because of their boycott threats, and found that these threats are increasingly hollow. Israeli trade with Asia will surpass the trade with the EU this year or next, which is a revolutionary change for Israel and indicative of the general trends in the world. The Greek attempt to force others to bail it out by threatening to commit suicide is the image one should think of regarding the EU relationship to the entire world. That is why they want to control the IMF and have the IMF bail out one bankrupt EU country after another. It won’t work for much longer. China and India will form an alternative to the IMF, and then the IMF will simply go bust. The Greeks and Europeans may discover to their dismay, that if they point a gun at their own heads and threaten to pull the trigger, the audience may simply reply, “Go ahead and pull the trigger.”

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