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 Tong (Cindy) Li
Adjunct Fellow; Country Manager, Federal Reserve Bank of San Francisco
Asia and Banking and Capital Markets and China and Finance and Global Economy
Dr. Cindy Li is a country manager and analyst in the Country Analysis Unit of the Federal Reserve Bank of San Francisco. In that capacity, she conducts research of Asian financial sectors and produces analyses of Asian foreign banking organizations.
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A quick look at the Greek Bank Run
By: Tong (Cindy) Li
May 17, 2012
   
   
We've watched the deposit outflow from Greece for nearly two years now. Indeed, from its peak at June 2010, deposits at Greece banks have declined by one fourth, at a rate of €3.5 billion per month. President Karolos Papoulias' announcement that depositors withdrew over €700 million on Monday fueled new fear that Greece's exit from euro zone may finally become true.

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Greek depositors have reasons to worry despite the fact that Greece does have an explicit deposit insurance scheme in place. For euro zone countries, the responsibility of guaranteeing bank deposits is in the hands of national governments. In other words, the credibility of the insurance deposit scheme depends on each governmentaEUR(TM)s financial situation. In 2011, the combined assets of the four largest Greek banks equaled 125 percent of the country's GDP. Considering Greece's dire fiscal situation, the deposit insurance scheme can now be considered useless.

There is also the fear that if Greece finally quits the euro zone, depositors will face a forced currency conversion. It is thus no surprise that Greek citizens and other EU depositors have chosen to move their deposits to banks in other euro zone countriesaEUR"and thus exacerbate the banking crisis. A lack of confidence is sufficient to make a prophecy self-fulfilling.

ECB won't rescue insolvent Greek banks. So we are probably not too far away from Greece's departure from the euro zone. If there is silver lining, it is the fact that the market is now prepared for Armageddon after three years of euro zone crisis. The next big question, however, is whether the euro zone firewall will work as promised and halt the contagion from Greece. The suspense continues.