To read Gordon T. Long’s full article, click here.
EURO EXPERIMENT: Beware of Lurking EU Bank Runs
This is a warning to prepare for potential stealth bank runs cascading from North
Africa and Ireland through to EU regional banking centers.
Stealth bank runs are the unrecognized and perilous serpent lurking presently below the European financial surface. They prey on slower moving archaic bond vigilantes and anyone else swimming in these dangerous uncharted waters.
Investors need to fully appreciate that a modern bank run looks and operates differently than what is depicted in the movies and what we most likely expect to occur!
For starters, it isn’t the individual depositor lining up, it’s now Corporate CFOs or Treasurers at their terminal en masse!
Secondly, it isn’t driven by local depositors; it is now driven internationally by Corporate Finance committees!
Thirdly, there are no telltale line-ups at bank doors. It is stealth, which will happen in an unexpected electronic ‘flash crash’ panic blur!
Today, a triggering event will initiate global ‘key strokes’ that will move unprecedented amounts of money within hours.
The Council of Foreign Relations just released a surprising report entitled: Sovereign Credibility and Bank Runs.
"In the midst of the financial crisis of 2008, governments helped to prevent bank runs by guaranteeing bank debts. Yet as sovereign solvency itself becomes an issue, such guarantees quickly lose their value. If Ireland provides a rule of thumb, bank runs can be expected once sovereign credit default swap yields pass 3%. The figure below shows that when Irish government CDS yields first passed 3% in early 2009, foreign deposits fled the country. This happened again in late 2010. Now that Spanish CDS yields have broken the 3% threshold, there is reason to be concerned about the stability of Spanish bank deposits as well."
The Council’s report conspicuously leaves out Portugal which the following European CDS spreads clearly identify as being above their 3% threshold line along with Spain and long time banking problem Greece.
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