Deposit flight from Europe banks eroding common currency
By Yalman Onaran
19 September 2012
An accelerating flight of deposits from banks in four European countries is jeopardizing the renewal of economic growth and undermining a main tenet of the common currency: an integrated financial system. A total of 326 billion euros ($425 billion) was pulled from banks in Spain, Portugal, Ireland and Greece in the 12 months ended July 31, according to data compiled by Bloomberg. The plight of Irish and Greek lenders, which were bleeding cash in 2010, spread to Spain and Portugal last year. The flight of deposits from the four countries coincides with an increase of about 300 billion euros at lenders in seven nations considered the core of the euro zone, including Germany and France, almost matching the outflow. That’s leading to a fragmentation of credit and a two-tiered banking system blocking economic recovery and blunting European Central Bank policy in the third year of a sovereign-debt crisis. Capital flight is leading to the disintegration of the euro zone and divergence between the periphery and the core,” said Alberto Gallo, the London-based head of European credit research at Royal Bank of Scotland Group Plc. “Companies pay 1 to 2 percentage points more to borrow in the periphery. You can’t get growth to resume with such divergence.” Capital flight is leading to the disintegration of the euro zone and divergence between the periphery and the core,” said Alberto Gallo, the London-based head of European credit research at Royal Bank of Scotland Group Plc. “Companies pay 1 to 2 percentage points more to borrow in the periphery. You can’t get growth to resume with such divergence.” Banks in the core countries also have been reducing their holdings of Spanish, Portuguese, Italian, Irish and Greek government bonds. At the same time, lenders in the periphery have been buying more of their own governments’ debt. That has further contributed to the fragmentation of credit along national lines, as banks collect deposits from people and companies in their own countries and lend internally. Organizations such as the International Monetary Fund have warned about the danger of such fragmentation. Financial disintegration along national lines “caps the benefits from economic and financial integration” that underlie the common currency, the IMF wrote in an April report. The disintegration can fuel a cycle of deteriorating economic conditions and weakening banks, said David Powell, a Bloomberg LP economist based in London. The more banks pay for deposits the less profitable some of their businesses are, he said. A Spanish lender that borrows at 4 percent from depositors and is limited by Europe-wide interest rates to charging only 2.5 percent for a mortgage is losing money. “The financial divergence is a symptom of the underlying economic divergence, but they feed on each other, making it harder to break out of,” Powell said. “Until companies and individuals are convinced that the euro will survive, they won’t invest in the periphery, and that will keep funds away.” […]
Deposit Flight From Europe Banks Eroding Common Currency
