Spain faces bank run

The latest available statistics on bank deposits show that €50 billion euros have left Spain since January last year. This was announced as the German news agency DPA reported that almost €900 million was withdrawn by Greek savers on May 14 alone.

According to data compiled by Thomson Reuters, Greek banks have lost around €72 billion (30 percent) in deposits since 2010. In Belgium, France and Italy, depositors have also taken flight from banks.

There are growing fears in Spain that the withdrawal of €50 billion (2.9 per cent of Spain’s deposits) will cause a bank run when customers who have lost confidence in their banks rush to take out their savings. The real magnitude of the current outflow of cash is unknown, as the data only includes the changes in deposit as of March of this year—the last month of published statistics.

Last week, Moody’s lowered its ratings on 16 Spanish banks, with a three-notch downgrade for the three major Spanish lenders, Santander, CaixaBank and BBVA, motivated by the deteriorating economic situation and the reduced creditworthiness of the government. This comes two weeks after Bankia was nationalized, when the Spanish government converted its stake in the company to equity in an effort to shore up its position.

The bank was formed in 2010 through an amalgamation of seven cajas (savings banks or credit unions) with high levels of toxic assets on their books as a result of the collapse of the property market since 2008.

It is estimated that Bankia possess €30 billion euros worth of debts to failed developers and those whose land has been repossessed.

Last week the Spanish newspaper El Mundo reported that customers had withdrawn €1 billion since the nationalization the week before. The next day Bankia lost 28 percent of its market value, forcing the economic minister, Fernando Jimenez Latorre, to claim that it is “not true that there was an exit of deposits.”

Bankia Chairman Jose Ignacio Gorigolzarri also came out in defence of the bank, stating that its “clients can be absolutely calm about the security of the savings they have deposited.”

These statements have helped the bank’s shares rise, closing up 23.49 percent at €1.756 euros last Friday. But this still represents a 53 percent decrease from its listing price of €3.75 euros. Bankia declined to comment on the reports of deposits leaving the bank. The €1 billion figure would be less than one percent of the bank’s total deposit base, but still reflects growing concern over its solvency.

The €1 billion exodus from Bankia, Moody’s downgrading and the news that Spanish banks’ bad loans have hit their highest level since 1994 at 147.968 billion euros are already affecting Santander. In Britain, where Santander has more than 25 million customers and 1,400 branches and holds millions of mortgages, loans and overdrafts, there is growing concern that Santander UK could be used to prop up its parent company in Spain, Banco Santander. It would also affect the financial institutions that have lent Santander UK on the interbank market.

Santander has tried to reassure its customers by setting aside €2.9 billion to cover bad loans, but these assurances are not enough. Customers remember the images of people queuing outside Northern Rock’s UK branches to get out their cash in 2007.

In Spain, the latest statistics published by the Bank of Spain show that bank deposits at the end of March were up 0.7 percent from the previous month at €1.16 trillion. However, this figure is down four percent compared with last year.

Until recently, the outflow of cash was confined to wealthy depositors and institutional investors. Now, there are signs that ordinary savers are withdrawing more money than normal. If this became the norm, it could cause a genuine domestic bank run.

One video uploaded to YouTube reflects what is happening in Spain. A woman, alongside dozens of journalists, waits for Minister of Finance and Public Administrations Cristobal Montoro to arrive in his official car to the ministerial building. When the minister leaves the car, accompanied by some of his aides and bodyguards, the woman goes to the minister, shakes his hand and says, “I am a citizen who was passing by. I am worried, my money is in Bankia. Do you think I should go to the bank and take it all out?”

“No,” answers Montoro.

“Are you sure?” explains the woman. “Yes, yes,” responds Montoro.

“I have been working all my life, and if someone takes my money, I will kill someone,” replies the anonymous woman.

The biggest fear in Europe immediately is over the Greek banking system. If a bank run occurs, every bank in the world would be affected—even seemingly healthy ones. The first to be affected by concerns over Greek solvency would be so-called “peripheral” countries like Spain. According to Expansion newspaper, US investment bank Goldman Sachs has been tasked with providing an independent assessment of the banks’ financial problems.

Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment, has called for a rapid intervention by the European Central Bank (ECB). He told Dow Jones, “Once a bank run begins, it is very hard to stop without a credible deposit guarantee… Given the fragile fiscal position of Spain, the European Central Bank is under increasing pressure to step in to calm depositors' nerves.”

Paul Krugman stated in Der Spiegel that more liquidity injections from the ECB are necessary. He added that the ECB should cut interest rates and give unlimited money to banks and governments.

Krugman believes that there should be an “unlimited intervention of the ECB” to save Spain and Italy, and said that an exit of Greece from the euro zone would cause a flight of capital in countries of the periphery and a bank run.

The immediate problem is that many banks in crisis-hit countries such as Spain and Italy have few assets to give to the ECB as collateral for the loans.

But a policy of handing billions to the banks, like the €1 trillion the ECB auctioned in December and February, will only benefit major bank stockholders, hedge fund managers and financial speculators. It would strengthen the hand of the very same financial elite that is demanding the implementation of drastic austerity measures across Europe.