European Central Bank fears bank runs will gut the EU

Things may get worse before they get better in the European financial crisis, Reuters reports. The European Central Bank is pressuring for a joint guarantee on bank deposits across the euro zone, amid fears that bank runs will spread like wildfire as investors head for the hills. Top economic official of the European Commission Olli Rehn warned that without added fiscal discipline, Europe will descend into a financial chasm.

Spain, Greece and fear of bank runs

Worries about whether Spain’s banking system will fail and whether Greece will survive in the euro area at all have deflated the value of euro currency to a two-year low against the U.S. dollar. Searching for a comparatively safe investment, European speculators have funneled their money into Austrian and French bonds, whose 10-year yields are at their low mark since the introduction of the euro.

Spanish banks moved massive amounts of money abroad in March at a rate faster than has been recorded since record-keeping of such transactions began in 1990, notes the Associated Press. The country’s fourth-largest lender, Bankia, reportedly was nationalized in May due to massive losses following a real estate crash. As much as $82 billion in net capital has been lost by Spanish banks in recent months.

IMF denies plans for Spanish bank bailout

International Monetary Fund Managing Director Christine Lagarde denied reports that the IMF is preparing for a Spanish bank bailout to keep Europe’s economy from sinking further into the mire.

“There is no such plan. We have not received any request to that effect and we are not doing any work in relation to any financial support,” said Lagarde.

In the meantime, voters in Ireland are calling for their nation’s government to approve a referendum that will pave the way for additional European Union aid, notes the New York Times. The June 17 Greek general election will go a long way toward determining the nation’s future in the euro zone. Reports indicate that Greece’s New Democracy party – which favors bank bailouts – is currently in the lead over SYRIZA leftists.

A demand for clarity

European Central Bank President Mario Draghi has made it clear that European leaders must decide where their nations stand in relation to the euro quickly, and that the ECB will not write economic policy for the entire euro zone.

“We will avoid bank runs from solvent banks. Depositors’ money will be protected if we build this European guaranteed deposit fund. This will assure that depositors will be protected,” said Draghi.

While the ECB is pushing for a joint deposit guarantee for depositors, Germany isn’t sold. As the paymaster of the European Union, Germany has been unwilling to risk more of its own taxpayers’ money to prop up the union. German Chancellor Angela Merkel said Europe should consider all options.

“There are integration steps which will require treaty changes. We are not at that stage today but nevertheless there are no taboos,” she said at a news conference.

Stemming the tide

Draghi testified before EU lawmakers that the European financial crisis has set financiers across the euro zone on edge, but that caution is not what’s required at this time.

“I urge all governments to keep this in mind, because it is better to err by too much in the very beginning rather than by too little,” he said, citing the recent failures of Spain’s Bankia and the French-Belgian bank Dexia.

‘Selling the cow to buy milk’

Sources

Associated Press

New York Times

Reuters