The European Bank Run

(aka the Handiwork of the Anglo-American Wolfpack)

There is a bank run now ongoing in Europe. Here’s how Felix Zulauf put it in May when he anticipated a bank run:

Felix Zulauf: Debt problems are never solved by more debt. In Greece, an epic drama is playing out. The Greeks are broke. The Irish are too. And the Portuguese are close.

Who’s next?

Spain is still doing well, but the things will proceed as in Ireland. The Spanish bonds are priced incorrectly. The European Central Bank is manipulating the price.

Is that the full count of crisis countries?

No, it is missing Italy. Deposits are falling at their banks. We are experiencing a bank run in slow motion. Banks in Italy and in Spain are being refinanced with ever more short-term financing. Soon the biggest buyer of government bonds will be missing. This means that yields have to rise. And the bomb will explode in Italy this year already.

Felix Zulauf turns bearish, expects major correction and QE3

The bank run soon was a reality in wholesale markets as US money market funds with significant exposure to commercial paper of European banks with significant exposure to the eurozone periphery pulled in their horns. See “Fitch: US Money Fund Exposure to European Banks Remains Significant” and “FT: Flight from money market funds exposed to EU banks” from late June for example.

Thus, the conspiracy theory has been that money market funds as a channel of contagion in the European sovereign debt crisis was driven by speculation and US and British hedge fund manipulation. This is the reason for the short selling bans in Europe. It’s “The Big Bad Wolfpack and the Four Little Pigs” all over again.

But, that’s not all there is to the story. Remember Washington Mutual? WaMu claims it was solvent and was seized improperly by the US bank regulator. This is in dispute. But what is clear is that WaMu was under assault by its uninsured wholesale depositors (those with accounts over the FDIC insurable limit of $250,000) before it was seized.

On September 11, Moody’s issued its rating: It downgraded WaMu’s debt to junk status, rated the company’s financial strength at D+ and issued a negative outlook on the company, citing its asset quality and the potential for future losses. Freilinger, WaMu’s assistant treasurer, fielded the call from Emrick, and had the thankless task of checking the accuracy of Moody’s forthcoming press release. Freilinger’s heart sank. “No bank of our size anywhere in the world survives without an investment grade rating,” he recently said.

The downgrade roared across the country. WaMu customers, reminded once again that their money might not be safe, pulled $600 million out of WaMu that day. “That’s when we thought, ‘Oh, crap, here we go again,’” said one WaMu manager who monitored deposits.

Soon, other rating agencies followed suit, sparking another massive bank run that would ultimately become the reason FDIC officials gave for closing WaMu.

Fast forward to Europe and we see exactly the same thing occurring now (hat tip Scott):

Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

In total, Siemens has parked between €4bn ($5.4bn) and €6bn at the ECB’s facilities, mostly through one-week deposits, this person said. Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB.

Siemens’ move demonstrates the impact of the eurozone’s deepening sovereign debt crisis on confidence in European banks.

The bottom line: this is a classic liquidity crisis now not just for the sovereigns but the banks in Euroland as well. I would consider this a bank run via the wholesale funding market – and it’s not just the Anglo-American wolfpack manipulating markets but genuine concern of creditors about the solvency of their financial institutions. The right thing to do is to accept the bitter pill and make substantially all of the credit writedowns at financial institutions quickly and recapitalize and/or nationalize the weakest banks. But remember, bank seizure can make the situation worse.

WaMu’s failure created panic among the unsecured creditors of other struggling banks, particularly Wachovia. But Bair stood behind the decision not to invoke the “systemic risk exception,” according to the report, as did the Federal Reserve. “I absolutely do think that was the right decision,” she said, according to the report. “WaMu was not a well-run institution.” She also said she thought the resolution of the thrift was “successful.”

But Treasury officials felt differently when interviewed by the FCIC, according to the report.

“We were saying that’s great, we can all be tough, and we can be so tough that we plunge the financial system into the Great Depression,” Treasury’s Neel Kashkari told the FCIC. “And so, I think, in my judgment that was a mistake. . . . [A]t that time, the economy was in such a perilous state, it was like playing with fire.”

What will the Europeans do here then? I am anticipating bailouts, liquidity injections and capital injections. But this is looking pretty dismal now so it is not clear if that will be enough.

P.S. – Maybe the Calafia Beach Pundit was right in relation to the recent surge in the US money supply, which he suggests might be a reflection of a scramble for USD assets. That’s how its looking right now.

  1. Matt Stiles says

    “What will the Europeans do here then? I am anticipating bailouts, liquidity injections and capital injections. But this is looking pretty dismal now so it is not clear if that will be enough.”

    Don’t forget more austerity. Combine all the above with that (plus, quite honestly, a more knowledgeable electorate), and I really don’t see there being as much appetite for can-kicking exercises in Europe as there was in the US.

    However, the political actors at the moment have made it abundantly clear that they will not be the person the goes down in history for abandoning the Euro Project first and ‘causing’ the rest to domino immediately thereafter.

    So I see a series of meetings, summits, joint-statements and promises that will not be kept.

    This will most certainly lead to eventual political revulsion as a) markets force bankruptcy and b) austerity drives unemployment higher. This is not to mention the demographic situation that is and will continue to create generational divides between the desperate youth and aging post-war workers that have over-promised themselves sweetheart retirement plans. Eventually, this will carry over into political results with euroskeptic parties growing.

    Until then, I expect more of the same. “Temporary Liquidity Measures” by the ECB, Fed, PBoC can be used for as long as possible to make it look like the political platitudes are actually doing something.

    Some would say that is quite the string of cynicism. However, what I am basically saying is that nothing progressive will actually happen until someone is democratically elected to make it happen. I think that’s quite optimistic considering the lack of popular opinion’s representation in the political theatre since 2008.

    1. Edward Harrison says

      Matt, you’re on the money. First and foremost Europe suffers a lack of democracy. The whole EU apparatus is seen by many Europeans as deeply undemocratic and so when they see these schemes, they recoil in revulsion. There was a good interview from the Bundesbank head on why he didn’t want the ECB to provide liquidity and his answer boiled down to wanting democratically-elected people to make these decisions instead of the ECB.,1518,787064,00.html

      1. David Lazarus says

        I do not see a change in the level of democracy at the top. The EU parliament are voted for quite democratically. The commissioners are appointed at the largesse of the leader of each country. They can be inept and corrupt and we have no way of getting rid of them. The same for the council of leaders who again do not act in the collective interest of Europe but solely for domestic issues. In some ways it means any changes are glacial.

  2. Tschäff says

    Historically when people are afraid of their currency’s store of value they tend to purchase other currencies, I wonder what the plan is if the Europeans massively buy USDs. We already saw what it caused the mcuh smaller nation Switzerland to do.

    1. Edward Harrison says

      What is the plan, Jeff? The rumour is already there that many are parking assets, not just in Swiss France but in USD because of the liquidity of US markets. Bottom line: there is the not just faint whiff of panic. The ECB is at its limit as the sole provider of support. Fiscal agents need to decide how to support the euro with means other than austerity because now that panic has set in, this is now seen as destructive to the euro.

  3. Philip Pilkington says

    Rumours in the Greek press that they’re considering a referendum on exiting the eurozone. *Queue ominous music*

    1. Dave Holden says

      A proper referendum or a eurocracy referendum where they re-run the poll until they get the “right” answer ;)

  4. McKillop says

    What’s this new ‘meme’ about pensioners and the aged workers who have “overpromised themselves sweetheart retirment plans”?
    Having contributed 9% of my salary over the years, and then emergency funds as well, how did I overpromise?
    Is this a new ploy to blame the worker but let the corporations who raided the funds -and have been after social security- continue to grant bonuses and other astronomical rewards?

    1. Edward Harrison says

      The NPV of all the contributions made by workers now retiring (and who have retired in the recent past) are lower than the expected benefits they are expected to receive. This is what the so-called unfunded liability for social security means. Put simply, this means people are putting in less in real terms than they are expected to receive under current guidelines.

      The question is what to do about it. People want to be able to consume real resources in retirement not dollar bills; unless you commit greater amounts of society’s real and financial resources to retirees, that can’t happen.

      Put simply, future generations must pay more – that is unless you think we can grow our way out of the problem via increased productivity (the contributions of fewer workers being able to support each retiree).

      1. McKillop says

        Yes, I understand that the pensions face shortfalls.
        Perhaps, as the means of production become more and more independent of human physical effort, as productivity is increased, some other method than labour, of wealth redistribution will suffice.
        Growth to support workers and pensioners -especially in a world that experiences great population growth – appears to be cancerous.

        1. McKillop says

          I wrote that pension funds face shortfalls: apparently, so do various banks.
          How much has been transferred or otherwise been made available for bank rescue?

    2. McKillop says

      Nor do I wish to carp, but it would appear to me that Europe isn’t the only place that suffers a “lack of democracy”.
      We seem to be unable to get our legislators to enforce laws or to develop policies that have not been proven to benefit the ‘wealthy’, who pay well for propaganda.

    3. Edward Harrison says

      For a full discussion of this see here:

      The following gets at the point and note that social security is very close to balance. The real difference is Medicare:

      “Assuming a normal life expectancy, the average-wage worker married to a low-wage spouse retiring in 2000 is promised lifetime Social Security benefits of $330,000 (figure 1). By 2030, that same couple can expect lifetime Social Security benefits of $470,000. Adding the lifetime value of Medicare benefits brings the package of benefits to $570,000 in 2000 and $960,000 by 2030 for this couple. For couples with higher wages, the package of benefits easily exceeds $1 million.

      Although Social Security cash benefits play a significant part in the soaring costs, Medicare accounts for much of the growth. From 1970 to 2030, real Social Security lifetime benefits are scheduled to grow 110 percent. During the same period, Medicare benefits are expected to grow 510 percent. Total benefits are expected to grow 220 percent over that period.2

      Who pays for these benefits? Under Social Security and Medicare, current workers earn entitlement to retirement benefits by paying a certain percentage of their annual wages in Social Security or FICA taxes. For the most part, this money is not saved, and the expectation is that when this generation of workers retires, there will be new generations of workers to pay their benefits.3 Since the tax rate is set in law, we can construct a measure of lifetime payroll taxes just as we did for lifetime retirement benefits. Even for current and many future retirees, the amounts of payroll taxes continue to be dwarfed by the amounts of benefits received, as seen in figure 2.”

      1. McKillop says

        Thank you.
        I didn’t mean to misinform (nor to err in my reply to your other response) but as a Canadian I only know a bit about the S.S.
        I assume similar problems are faced by all workers here in Ontario, Canada and elsewhere.
        Not enough people working towards making the pie: too many needing a piece, the bakery owned by a corporation that is controlled by the wealthy.
        Yet, despite a shrinking labour force and a shrinking number of contributors to pension funds, and other social services, the wealth of the society grows.
        Do we poor fight among ourselves for the crumbs while others -you know, the people who have scads of property and wealth- keep a greater share, or do we find other methods of redistribution?

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