Tick, tock: The risks of depositor flight in Greece

On the day Royal Bank of Scotland's shares fell by 40%, in October 2008, we were huddled in the Starbucks across the road from its HQ. My cameraman started quizzing me relentlessly about deposit guarantee limits:

"What," he said, "you mean if I have more than 50k in an RBS bank account it's not guaranteed?" "Yes", I replied, offhandedly. I'd been deep in the detail of deposit guarantees for a week already, after the Irish state guaranteed everybody's holdings to 100%.

When I looked around he had gone. I spotted his bobble hat in the distance frantically moving between the high street branches of banks on Liverpool Street. The rest of the day was spent alternating between filming the bank's collapse and getting his money out of it.

This is called a deposit run - and in the days of the internet you do not really need to put your bobble hat on and leg it: you can do it from a seat in Starbucks. It's what took down the US banking system after AIG - about $400bn withdrawn from internet bank accounts in the first week. And it was, as we now know from Alistair Darling, on the point of making that cameraman's behaviour entirely rational: the ATMs were "hours away" from shutting down.

Today David Owen of the investment bank Jefferies International warns that it is depositor behaviour, not European bank exposure to Greek debt or Greek-linked CDS, which could be the most dangerous source of contagion from what's going on in Athens (and Brussels):

"What should now be worrying policy makers is the risk of deposit flight from the periphery and what that would then potentially imply for activity and government debt dynamics in those economies. Think where government debt dynamics could eventually end up in Greece say, if the banking sector (balance sheet of almost €500bn) effectively shut down and had to be nationalised." (Owen D and Alexandrovich M, 24 June 2011, Jefferies International)

Owen points out that the Greek central bank significantly hiked the amount of liquidity it pumped into the economy in May (ready money) by 10bn euros - and that this would have been provided effectively by the German central bank as part of the Eurosystem. Everybody is now watching the figures due at 10.20am on Tuesday for one-week liquidity in the Eurozone.

There is already evidence of medium term flight from Greece. This was one of the reasons the credit rating agencies began their recent spate of downgrades. After euro 13bn flowed out of the Greek banking system (5% of all deposits) in the first four months of this year (and 12% in the 12 months before) S&P concluded:

"In our view, outflows of domestic deposits could conceivably continue to intensify depending on the public's view of the impact that Greece's deteriorating creditworthiness may have on the banking system. Domestic customers of Greek banks have demonstrated their sensitivity to signs of deterioration in the sovereign's creditworthiness…" (15 June)

One complication of this potential flight of cash and deposits is what it means for counter-crisis measures. Quantitative easing, as practiced by the Bank of England, was designed to pump money into the banking system. Though the money supply has recently turned negative in the UK, without QE says Owen it would have been deeply negative for the past three years.

The problem in the Eurozone is that with cash flight out of Greece, or out of the banking system into the mattresses of Attica, pumping money into the Eurosystem does not equal reflating the periphery. What it does is, Owen argues, leave the periphery floundering while over-pressuring the core economies. That's why it would not work.

We already know, anecdotally, that demand for gold is on the increase in Greece and across Europe. There are other anecdotal stories around worth keeping an eye on: Swiss watch manufacturers report a 50% increase in sales of gold watches to Greece, Portugal and Spain in May, to 42m euros worth in a single month. (Thank god it's not gold medallions I am thinking because while I love the 1970s funkadelic look I don't want to see it on my holidays).

So as the media's eyes are glued on the Greek strikers and indignant ones, it's worth keeping your eyes on the not-so-indignant ones: the depositors, the suppliers of liquidity, the watch shops at the airport and, of course, the cameramen.