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Back-Door Bank Runs in Europe in 2012

Written by Gary North on November 21, 2011

The modern bank run is not where depositors line up to pull their meager funds out. It is when hedge funds and large investment funds refuse to roll over credit lines to banks. That takes place behind closed doors.

In 2012, European banks must refinance $660 billion of loans. The banks are in hock to the lenders. But interest rates are rising, because lenders see that there is going to be a continuing crisis in the European bond structure. The banks have borrowed at low short-term rates to buy long-term government bonds at high rates. It looked like easy money two years ago. Now it looks like the greatest threat to Europe since 1945. That’s not just my assessment. It’s also Angela Merkel’s.

Last week, the governments of Italy and Spain briefly had to pay 7% to sell their bonds.

The largest Italian bank, Unicredit, has been the subject of articles raising questions about its vulnerability. It had to pay 10% last week. That bank has assets of a trillion dollars worth of euro assets. What if it goes belly-up?

There is a slow run on Greek banks. They have lost 20% of their deposits since early 2010.

Doug Noland writes:

With a crisis of confidence impairing the markets for both sovereign and banking finance, it was seemingly yet another “inflection point” week in the marketplace.  Increasingly, the markets are viewing the situation as unsustainable.  With Italian debt in a downward spiral, the soundness of the entire European banking system is in serious jeopardy.  Troublingly, there was heightened focus on counterparty and derivative issues, including U.S. bank exposure to European debt, the sovereign Credit default swap marketplace and other counterparty exposures.  Fear that EU governments will be forced to recapitalize their faltering banking systems has weighed heavily on already depleted confidence in the creditworthiness of sovereign Credit.  Increasingly, the Credit standing of France, residing near the epicenter of Europe’s “core,” is imperiled by the possibility of a massive bank recapitalization program.

So, the powerful force of contagion effects has the marketplace convinced that something has to give.  The EU is running out of options, as market confidence deteriorates by the week.  European monetary union is at heightened risk.  This has set in motion “capital flight” dynamics that risk strangling individual banks and banking systems, especially in Spain and Italy.  The ECB has stepped up support for Spanish and Italian sovereign debt.  The market takes little comfort in these operations, appreciating that this is seemingly the only bid in an essentially frozen marketplace.  As the situation turns dire, market participants assume that the Germans and ECB will have no option other than to back down and assume the role of “buyer and guarantor of last resort.”

The crisis is in its early stages. Yet investors seem to think that some behind-the-scenes political deal can save the system or, failing this, massive inflation — unconstitutional — by the European Central Bank.

The experts in Europe keep telling us that they have fixed the system, yet week after week, it grows worse.


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  1. The good parts of a book may be only something a writer is lucky enough to overhear or it may be the wreck of his whole damn life and one is as good as the other.-Ernest Hemingway