Large movements of money are under way in Europe these days, as knowledgeable Southern Europeans withdraw from Italian, Greek and Spanish banks and seek for safer places to leave their cash. This is the main push behind the drop in German Bund yields, which are now acting in similar fashion to Treasuries as a safe haven for capital.
This so-called deposit flight has prompted Northern and Southern European banks alike to set up various incentives to attract new customers – either in spite of, or in order to take advantage of, the uncertain monetary situation (will Greece leave the Euro? Will the Euro collapse?).
A year ago, worries over Europe’s finances looked more like a red herring or useful straw man vis a vis the debt ceiling wars in the U.S. Today, however, it’s a more serious matter. As it turns out, there are several obvious early warning signs that Europe’s banking system as a whole should be cause for equal concern amongst investors, savers and depositors.
Europe’s Faltering Banking System
In the wake of the Greek elections and speculations about the #grexit (Greece leaving the Euro), “billions of euros’ worth of deposits” began to trickle out of the Greek banking system. Then, the Spanish government decided to nationalize Bankia SA, the Spanish lender that had already begun losing a number of deposits over a period of several weeks.
As if this were not clue enough, a consumer group in Italy, Altroconsumo, has apparently been advising clients since December 2011 to take precautions by transferring their money out of domestic banks and into foreign banks with branches in Italy.
Since then, Northern European banks such as Barclays and HSBC have been championing themselves as safer havens (offering as much as 3.5% on 6 month-deposits and giving all the interest to them upfront!) and some have been offering freebies of everything from flat-screen TVs and free English classes (one Spanish bank is now extending this offer of a free flat-screen TV indefinitely to anyone who opens an account and has their unemployment checks deposited with them).
In one bizarre twist of irony, a smaller Greek bank, the Agricultural Bank of Greece, has set about opening a new branch in Frankfurt and offering depositors a higher rate (3%) than local German banks (who are behind the Greek bailout itself). If you like the sounds of this, you can bet on Greece with a Greek-only ETF.
In all respects, there is a race on for everyone’s money in Europe at the moment. It is not just happening in one direction.
Will There Be Runs on European Banks?
If you read the above warning signs, it’s clear that in some gradual sense, we’re already witnessing runs on European banks. Last week there was a report of an effective (if small) run on a Swedish bank (a very unusually long line at a single ATM).
Given this, it isn’t surprising to see Barclays offering products such as its “solvency deposit” programs in Spain, where it has picked up quite a bit of new, stressed capital.
Those who can remember back to 2009 post-crisis, however, will recall that even banks like Barclays were at one time quite troubled for liquidity and thus even now should still be considered cautiously by prudent investors and shareholders.
And, given all of this, it is also no wonder that so much money is still finding its way into Treasurys, where at least it is obvious that failing is impossible (more money will always be printed), and on top of that security you will make at least 1.5%. More than Japan and Germany.
So you need to stay tuned, the warnings are serious – but at the same time it doesn’t mean that Treasuries are the only other option for your money. Look to Brazil, Canada, Australia and China in the meantime. It’s commodities that you need to pay attention to. But take advantage of the historic lows on the Euro, too. But I’m still not betting on a disintegration of that currency. It’s politically and economically unviable – in the same way that not increasing the debt ceiling in the U.S. was never a real option, either.-