by Elliott Morss
Editor’s note: As the title indicates this brief analysis summary by Dr. Morss clearly shows that conditions are “depression-like” when it comes to unemployment and bank weakness associated with the weak sisters (so identified by Dr. Morss in a recent series of articles).
While the media is full of stories about financial chaos in the Eurozone, little attention is being given to the human tragedy these countries are facing. So in passing, Table 1 provides data on the unemployed in the now five “weak sister” countries.
It is interesting to note that because of austerity measures, unemployment is significantly higher in all countries than it was in 2009, the bottom of the global recession: 7.4 million out of work in 2009 versus 9.2 million today. That is grim, and prospects are that if the Eurozone is to hold together, more austerity, under ECB/IMF directives, will occur. That makes no sense. More austerity will cause higher unemployment rates. Economic activity will slow further causing government revenues to decline…. Enough about human tragedy. Back to bank worries.
A couple of weeks ago, I compiled the following table on potential banks exposures relative to selected countries deposits. The data, from the Bank for International Settlements, includes both “foreign claims” and somewhat more ominously, “other potential exposures”.
The lender countries appear vertically in the left hand column. We know the Greek case is near hopeless and that Italy is now the focus of attention. The numbers make it clear that Italy worries are of far greater concern to banks than Greece. For example, look at France: Greek exposures are only 1.2% of deposits while Italian exposures are 9.8%. That is huge. No banking system could survive such a bad debt loss. And that takes me to another issue – the danger of runs on banks.
A bank run occurs when depositors, worried about the safety of their deposits, pull them out. This causes real problems inasmuch most banks keep less than 10% of their deposits in cash.
So what would I do if I had Euros deposited in any Eurozone bank? That is easy. I would pull them out immediately and stuff them under a mattress. Why? Two reasons:
- What if Greece decides it has to get out of the Eurozone and go back to its own currency? Yes, there is a way that I described in a recent article whereby you could keep your Euros and they would become interchangeable with the new currency at market rates. But do I trust the Greek government to implement such a program? No.
- Take another look at Table 2 on banks exposures. Remember that these are aggregate numbers, and only those reported to the BIS. Individual banks could have much higher exposures. And fine: European banks have mechanisms in place to protect depositors when banks go belly-up. Still, I would, at least for now, pull my Euros out of banks and deposit them under my mattress.
If I, as a semi-literate financial observer, have these concerns, what might happen soon in Europe? Serious runs on banks are a real prospect.