Southern European banks are facing sizeable problems, and there’s huge potential for this to intensify and spread through Europe, possibly to the UK. There are only two effective ways to stop a bank run – the relevant government either nationalises and recapitalises affected banks (far too expensive) or guarantees depositors. Sadly, deposit guarantee schemes in southern Europe are for the most part completely inadequate and sovereign finances are so dreadful that a guarantee would fail to provide any surety for depositors. Northern Europe is unprepared to underwrite depositors in the south. Policy-makers give every appearance of having run out of ideas. However, all is not lost. Germany is apparently considering a growth plan, and there is a fresh proposal for the establishment of a European Redemption Pact which has some merit. Time, however, is in short supply – it is five minutes to midnight for the single currency.
Michael Derks is chief strategist at FxPro.
Eurozone authorities have the ability to mitigate the consequences of a Greek exit, but the political mood needs to shift dramatically. Cross-county bank guarantees would stop bank runs spreading from Greece to other peripheral countries. Capital could be provided by the European Financial Stability Facility and the European Stability Mechanism (ESM), the latter set to activate in July. However, a pan-European banking union faces opposition from Germany, which would be jointly liable for deposits across all euro member states. While the European Central Bank (ECB) can’t provide capital, it can infuse the banking sector with unlimited liquidity. It could guarantee deposits across countries and give access to its balance sheet to the ESM, which could leverage itself up many times. After all, it is the ECB’s mandate to do whatever possible to maintain the banking system’s stability.
George Tsapouris is an investment strategist at Coutts.