FRANKFURT/BRUSSELS |
(Reuters) - As the euro zone
ponders a possible Greek exit, policymakers have not yet built a shield
robust enough to prevent a bank run in one country sending others in
the bloc deeper into crisis.
A push by the European Central
Bank for the euro zone to stand behind struggling lenders is slowly
gaining traction with government leaders but the bloc has yet to build
backstops to prevent, or cope with, a sudden collapse of confidence in
banks.
Last
week, European leaders discussed pan-European means of supporting
banks, measures the ECB hopes will include a bank resolution fund to
deal with the fallout from the wind-up or restructuring of a failing
lender.
Such a body would
complement the 1 trillion euros of 3-year credit the ECB has lent in
recent months to banks across the 17-country euro zone, which has helped
oil the wheels of Europe's banking system where confidence is so low
that most remain reluctant to lend to one another.
But
a wave of withdrawals by depositors - either for fear that their
government is too weak to stand behind its banks or that their country
will exit the euro and switch their savings into a vastly devalued
national currency - would represent a whole different scale of crisis.
Such pressure on Ireland's banking system prompted a national bailout by the International Monetary Fund and European Union.
Now investors are worried about the contagion effect a Greek exit from the euro zone could have on savers in other countries.
"Preventing bank runs in Italy,
Spain and Portugal should be the top priority," said Berenberg Bank
economist Holger Schmieding. "Policymakers need to make sure that the
potential Greek precedent of a forced conversion of domestic euro
deposits into a weak new currency would not spark a run on banks ...
elsewhere."
The ECB is pressing the
euro zone to set up a fund that would prevent this dangerous ripple
effect, a message reinforced by ECB policymaker Joerg Asmussen last
week.
"The recapitalisation of a
troubled bank by its government may lead to a deterioration of the
government's fiscal position," Asmussen said. "The deteriorating fiscal
position in turn further weakens banks' balance sheets, through their
holdings of sovereign bonds.
"This
feedback loop has to be stopped ... A European bank resolution
authority and a European deposit insurance scheme are two elements that
could be used to address the nexus between sovereigns and banks."
Any pan-euro zone deposit guarantee scheme would need to be large in order to stem ebbing confidence.
The
typical national guarantee in Europe now covers the first 100,000 euros
on deposit, something that would do little to reassure corporate
investors with millions.
It was the decision by companies in Ireland to withdraw deposits that accelerated its banking crisis.
The
question of how to shut down or restructure teetering banks has risen
to the top of European policymakers' agenda as concerns grow about the
impact if Greece were to leave the euro zone, and as problems deepen in Spain's large banking sector, which is laden with bad property debts.
But policymakers are far from setting up a backup fund, not least because European paymaster Germany, who does not want to support laggard banks in Spain, is reluctant to finance it.
WAITING FOR DRAGHI
In
the absence of a resolution fund or insurance scheme to deal with a
bank collapsing, many investors expect the ECB would act to head off a
bank run or a similar systemic threat.
ECB
President Mario Draghi has said the 1 trillion euros the bank released
into the financial system with twin 3-year, ultra-cheap lending
operations - or LTROs - in December and February avoided a major credit
crunch.
In the case of Greece, the
belief is that the ECB would act again to contain a bank run, said
Clemens Fuest, a professor at Oxford University and a member of the
academic advisory board of the German Federal Ministry of Finance.
"The
expectation seems to be that the ECB will prevent it by providing
whatever liquidity is needed," he said, adding that this could either be
from the ECB directly or as emergency funding from the Bank of Greece
with the ECB's backing.
Greece's
four largest banks received some help this week, with the country's bank
stability fund approving an 18 billion euro injection of bailout money
to rescue them.
If this proves
insufficient and contagion spreads to other countries' banking sectors,
policymakers may rapidly have to dust off plans to provide guarantees to
weaker banks or inject further capital - scenarios discussed in the
past but on which there has been no agreement.
CAPITAL FLIGHT
The
banking environment has steadily deteriorated, according to statistics
from the Bank for International Settlements, which chart the flight of
capital from the euro zone's weakest members.
Figures
from December last year show a sharp decline in deposits from abroad
held in banks in Greece from $160 billion in late 2009 to less than $80
billion.
Ireland's bank deposits
from abroad fell from $905 billion to $471 billion over that time and a
similarly sharp fall was seen in Portugal.
Households
and companies have almost 11 trillion euros on deposit with banks in
the euro zone, with over 3 trillion in Germany alone, according to ECB
statistics.
One way to reinforce
banks would be to allow the euro zone's rescue scheme, the European
Stability Mechanism (ESM), to inject capital directly into lenders - an
idea which Spanish Prime Minister Mariano Rajoy is pressing but which
Berlin opposes.
Under Europe's
existing arrangements, countries like Spain - should they require
assistance with their banks - must apply for a sovereign bailout
programme, a humiliation too far.
"Taking
on the risk of a bank failure at a European level through the ESM is
far preferable to the much greater risk of a sovereign default," said
John Fitzgerald, of the Economic and Social Research Institute, a
Dublin-based think-tank.
In the
absence of that, Berenberg's Schmieding said were Greece to leave the
euro zone, Spain should apply to Europe's bailout funds for aid to
recapitalise its banks.
The ECB
could cut interest rates and - together with national central banks -
supply banks with liquidity, he said, possibly with new long-term loans.
"COURAGEOUS LEAP"
Some
ECB policymakers are open to considering a further LTRO, sources close
to the bank say, but they face resistance from orthodox policymakers
already worried by the balance sheet risks the ECB has taken on with the
first two operations.
Germany's
Bundesbank has already said the ECB should not significantly increase
the risks associated with providing liquidity to Greece, and believes
the impact of a Greek exit from the euro zone would be substantial but
"manageable".
Easing the
requirements on the collateral banks need to put up to access ECB funds
is another way the central bank could help lenders short of liquidity -
but such a technical step will not help if they become insolvent and a
systemic risk.
Draghi is pressing
governments rather than the ECB to take the decisive action and
delivered a stark message last Thursday, saying: "We have reached a
point in which the process of European integration needs a courageous
leap of political imagination in order to survive."
(Additional reporting by Eva Kuehnen, editing by Mike Peacock)
