With the interest rate on short term Greek government debt approaching 100%, markets are saying that default by Greece is inevitable. Greece is expected to run out of cash within weeks and massive civil unrest may slide into anarchy as protests become increasingly violent. The bailout by the European Union that was supposed to save Greece appears to be on the verge of collapse according to The Wall Street Journal.
Sixteen months after a landmark bailout and seven weeks after a fresh deal to pull it back from the brink of collapse, Greece remains in danger of descending into a messy, destabilizing default.
There is little room for anything to go wrong. Without more aid, Greece will run out of cash within weeks, senior Greek government officials say.
Meanwhile, popular dissent in Greece is seething. Mass protests are expected to greet Prime Minister George Papandreou in Thessaloniki, Greece’s second city, where he is slated to give a speech Saturday at the international trade fair, defending the harsh fiscal cuts his government has pledged.
There is, too, a loss of confidence in European leaders’ ability to sort out the mess. Europe’s failure so far to rescue its first patient has had immense consequences for the 17-nation euro zone, despite the fact that Greece’s economy is but a tiny fraction of it.
Greek citizens have responded to the looming default of their government by withdrawing their money from Greek banks at a record pace. Greek banks have reportedly run out of safety deposit boxes as Greeks withdraw their life savings to put into bank vaults. The guardian.co.uk reports Greece in panic – fear is driving a silent bank run.
In May alone, almost €5bn (£4.4bn) was pulled out of Greek deposits, as part of what analysts describe as a “silent bank run”.
“Every time the markets move, I get phone calls,” says an Athens-based fund manager. “They’re from investors asking: ‘How can I get my money out of the country?’ ”
Bags of money in garages, frightened savers fleeing banks and even the country: these aren’t the sort of stories you associate with a comparatively-prosperous European country, but with a developing one facing a life-or-death economic crash.
As the run on Greek banks intensifies, the systemic risk of contagion across all Greek banks becomes unavoidable. Panicked depositors are not likely to try and figure out if their bank is sound. As the panic spreads, bank failures and banking holidays will become inevitable, effectively crippling the Greek economy and banking system.
The risk of a bank run expanding across Europe becomes acute as fearful depositors realize that it is not just a Greek problem that needs to be contained. Soaring bond yields on the debt of major European countries such as Portugal, Spain and Italy are screaming that investors expect a chain of defaults that cannot be contained by central banks.
Greece represents the tip of the spear as the systemic risk of sovereign defaults threatens the global financial system.