How Money Leaving Greece Threatens Banks and Could Threaten the Rest of Us

As the Greek government's finances deteriorate at an accelerating rate, money has fled the country. People, suspecting the government may see their money held in banks as cash it can use to shore up it's finances, have been pulling money from banks. Where it goes, no one knows - or at least such information is not easily accessible. You can understand why people are concerned about their bank accounts:

The Bank of Greece has plugged cash shortfalls by tapping the reserves of other public sector entities, including pension funds, hospitals, and universities. How much money these entities have and how easily the government can directly access these funds is critical to knowing how long Greece can keep paying its bills. Officials directly involved in the bailout talks have said they don’t have a clear picture.

For the Greed central bank, it's a last minute grab for anything they can find. They need cash to meet their obligations. It's as simple as that. However, as is true in today's national economies, most of which are tied together somehow in one interrelated world economy, simple can be a bit complex:

If the government taps public sector deposits held at commercial banks, this could add to funding pressure on Greek lenders, which have lost more than 20 billion euros in deposits since November and are reliant on an emergency funding through the European Central Bank to prop them up.

So as depositors take money from the banks to send elsewhere - presumably somewhere outside Greece, and therefore outside the grasp of the government - the government's raid on public sector entities puts additional pressure on Greek banks, as the cash these entities hold is held at...Greek banks. And as Greek banks lose deposits, the danger increases that a bank or banks will fail.

Notice that the emergency funding to prop up these banks comes not from the Greek Central Bank itself, but from the ECB - the central bank of the European Union. So the problems engendered by the Greek government's fiscal irresponsibility involves not only Greece relatively small economy but now involves the European Central Bank. The impression we get so far, though, is that, given the relatively small size of Greece's economy, and the relatively small size of the liquidity needs of Greek banks, this should not create a firestorm that engulfs other countries in Europe. But do we really know that for sure?

If I live in a house made of brick, which was built with fireproof materials and extra fire safety that includes the ability to isolate a fire in a specific room - at least for a period of time - by locking the doors and sealing the windows to that room, a small conflagration can be contained. But if I live in a wooden house, whose only "fire-proofing" is fire alarms, a small conflagration will easily engulf the whole house.

So, of what does the financial system of the European Union consist: brick or wood?

If we knew that the EU was financially sound, with growing economies and a stable banking system which featured low levels of debt, low leverage, sound lending practices, etc., etc., we might be more reassured that whatever happens in Greece - as they say of Las Vegas - stays in Greece. But, of course, we don't know that. And remembering that the world's economy includes the U.S., while it may seem remote - and likely is at this time - conflagration that engulfs the European house could threaten our own economy at some point. 

So far, however, so good. The can continues to be kicked. And for all we know, it will be successfully kicked yet one more time.