There is a phenomena occurring throughout Europe that is being hushed, the topic is money flight and it belongs in the same Pandora’s box of discussion subjects governments and central banks would rather not be part of lunch or dinner table ‘investment discussions’ amongst the masses..
“So I rushed down to Barclays at lunch time, took all my cash out, bought any old gold at the pawnbrokers, (they’re doing teeth fillings now!), then nipped over to the money exchange shop and exchanged my pound notes for; Francs, Yen, Krone, Aussies and Loonies..the bloke behind the counter has finally stopped with the lame “Loonies Sir?” joke now, I think he finally gets it.”
“Strange how they insist on passport ID at the money shop just to change a couple of hundred quid. Perhaps hiding it under the bed isn’t such a good idea, maybe the ‘money police’ will come and wake me up in the middle of the night and demand it back, or give me a caution whilst converting it into sterling whilst confiscating all my gold..hahahaha, that would never happen..would it?”
Money flight appears to be happening at many levels, from banking institutions to bakers the trust in various country’s or states’ domestic currencies, the interest rate return offered, and overall security must be at lows not experienced since the banking crisis of 2008-2009. The latest buzz, converting and depositing into Scandinavian currencies as a safe haven, may gather pace particularly now the Swiss franc has (temporarily or otherwise) lost it’s safe haven status whilst the yen can not retain its haven status perpetually.
In fact the “save haven” description of currencies could be (in the present times) a misnomer, currencies could conversely be in a ‘race to the bottom’ as institutional investors search for the ‘best of the worst’ options available. It’s not that there’s faith in the Japanese govt’s policy, or investors think the Swiss central bank has exercised superb management during the crises since 2008, the haven status of yen and francs exist because they’re not euros, sterling, or USA dollars.
European banks are losing deposits in huge swathes, the debt crisis has left many institutional and private depositors spooked. Deposits in Greek banks have fallen by 19% over the past year, the decline in Irish banks deposits has been spectacular, close on 40% during the past eighteen months. EU financial firms are lending less to each other whilst USA money market firms have significantly reduced their exposure in most European banks. This behaviour and lack of trust is highly significant given it’s symptomatic of the months before the 2007-2009 credit crunch.
Whilst the ECB has stepped up to the plate to offer assistance of up to €500 billion, the same banks are throttling lending, attempting to sit on the extra infusion of liquidity whilst deposits are haemorrhaging out cannot be sustainable.
This lack of trust and deposit money flight domestically is not exclusively the preserve of Greek and Irish banks or other PIIGS’ banks, Germany has experienced a twelve percent fall by financial institutions since 2010 and a 28% decline since 2008. In France similar deposits have shrunk by 6% since 2010 and Spain has experienced a 14% drop since May 2010. But here’s a startling conundrum and comparison as to why, despite the commitment by govts such as the UK and the ECB to separate retail and investment money, they must be concerned with regards to private individuals adopting the behaviour of financial institutions. In Italy retail deposits have only fallen by 1% since 2010, but other outflows by institutional depositors have shrunk by €100 billion in the same period, a 13% decline confirmed by the Bank of Italy and ECB data. If small investors adopted the same money flight practices as institutions then banks’ capital could be severely tested. Figures for purely retail deposits are difficult to corroborate, however, the accepted wisdom is that they account for circa 10% of the total. Retail investors in Italy also own circa 63% of banking debt in the form of bonds, given they ‘promise to pay’ up to 5% versus an average of 0.88% on normal money deposits the attraction is obvious. However, a secular flight from Italian banks by retail customers could be terminal.
European banks are continuing to approach the ECB for assistance, Greek and Irish banks took a combined €100 billion in August and Portugal and Spain circa the same. Loans made in return for bonds at this stage whilst potential contagion exists is regarded as incredibly risky with certain commentators likening it to parking garbage with no land fill in sight. Banks outside of Greece, Ireland, Portugal and Spain have $1.7 trillion at risk in loans to those countries’ governments and corporations, as well as guarantees and derivatives contracts, according to the Bank for International Settlements. For anyone slightly confused as to where the risk lies and what the ultimate pill could be there’s the figure and that’s why Tim Geithner is collecting his air miles and bashing the American Express card.
Greek lenders own approx 40 billion euros of their government’s sovereign debt. If they take losses of 40 percent or more on those bonds, it would wipe out all the capital held by the country’s banks according to the European Commission. Greek government bonds are already discounted by 60 percent in the secondary market, according to data compiled by Bloomberg. In addition to fearing a drachma conversion, affluent Greeks are moving money out of the country to avoid having their bank accounts become targets for tax collectors. This dynamic is also at work in Italy and has undoubtedly been a silent practice in Ireland for some time.
The fact that European lenders have now resorted to moving money out of the region could either be regarded as the ultimate betrayal or ironic given the institutions trust the Fed over and above their issuing banks. The cash that foreign banks keep at the U.S. Federal Reserve has doubled to $979 billion at the end of August from $443 billion at the end of February, according to the Fed’s data. If the ECB are complicit in this action then the loop of betrayal is complete. If the central bank has such a lack of confidence in it’s own currency that it’s turning a blind eye and actively encouraging flight to the USA dollar, which in turn is actually charging for huge deposits, in effect giving negative interest rates in return for safety, then truly a new low and Nadir has been reached.
For those amongst us who can’t wire a billion or so to the New York bank of Mellon perhaps the money shop, the pawnbrokers and the mattress could prove to be our safe havens. Just make sure you put the door chain on when answering the door at night and always ask for proof of identification.