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Wednesday, June 13, 2012 4:02 AM

Greece Withdrawals Up Again Due to "Uncertainty"; Situation Not Under Control; US vs. Greece

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Here is an interesting headline from the Greek website Ekathimerini: Withdrawals up again due to uncertainty.

The political polarization and uncertainty regarding Greece’s position in the eurozone generated a fresh spike in bank withdrawals last week.

In the last few days, withdrawals have increased again as bank clients convert their money into foreign bonds (mostly German) or opt for various alternative investments based on the US dollar in mutual funds.

In May, deposit withdrawals were estimated to have amounted to 5 or 6 billion euros. Bank officials say the situation remains under control, pointing at the completion of the first phase of the recapitalization plan with the disbursement of 18 billion euros to the country’s four main commercial banks that has strengthened them considerably.
What about Capital Controls and Border Controls?

Reuters reports Euro zone discussed capital controls if Greek exits euro
EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen - no one Reuters has spoken to expects Greece to leave the single currency area.

But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.

Belgium's finance minister, Steve Vanackere, said at the end of May that it was a function of each euro zone state to be prepared for problems. These discussions have been in that vein, with the specific aim of limiting a bank run or capital flight.

As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.

"Contingency planning is underway for a scenario under which Greece leaves," one of the sources, who has been involved in the conference calls, said. "Limited cash withdrawals from ATMs and limited movement of capital have been considered and analyzed."
Things Uncertain

  • Who will win the election?
  • Does it even matter who wins?
  • Will Greece return to the drachma?
  • Will Greece or the EU impose capital controls?
  • Will Greece or the EU impose border controls?

On the surface that seems like one heck of a lot of uncertainty. However, let's look at what is certain.

Things Certain

  • It is 100% certain the risk of confiscation makes it foolish to leave "excess cash" in Greek banks. By "excess cash" I mean deposits greater than what is immediately needed to pay current bills.
  • It is 100% certain that no good can possibly come to those who do leave "excess cash" in bank accounts. 
  • It is 100% certain the need for safety overrides the check-writing convenience of keeping "excess cash" in banks.

One can easily argue that "all" deposits, not just "excess" deposits should be in a foreign bank. However, a rational-thinking person might also worry about confiscation by other European banks.

Regardless, it is 100% certain the sensible thing to do is to remove money from Greek banks. That certainty is the true driver of capital flight.

U.S. vs. Greece

Some might argue the US is in the same boat as Greece. After all, what good can leaving money in a US bank do?

Such arguments are misplaced.

In the US, there is not a safer place to keep excess cash, at least up to the FDIC limit. In the US, it is 100% certain the dollar is not on the verge of a forced devaluation to "wollars". Finally, common sense suggests having enough liquid assets in cash for emergencies.

In Greece, the "need" for safety overrides the "desire" for convenience.

No Mad Rush Yet - Why?

In light of the above, inquiring minds might be wondering why the capital flight in Greece has been relatively orderly.

The simple explanation is people cannot or do not think. Those who do carefully consider probabilities long ago decided to yank their money. Others are just now thinking, which explains the continued capital flight.

Those who have not yet yanked their deposits from Greek banks have either not considered the compelling risk-reward setup for immediately pulling out all excess cash or they foolishly believe political promises that Greece will stay on the euro.

What Is Being Rescued?

My friend Pater Tenebrarum comments on the situation in Velvet Glove, Iron Fist
The idea of imposing capital controls and limiting the free movement of people across borders are likewise threats that must make every thinking person wonder what the hell the whole 'rescue operation' is supposed to be 'rescuing'. After all, these are basic tenets of the EU treaties the possible suspension of which the eurocrats are discussing here. This is what the EU was established for in the first place: to enable the free movement of people, goods and capital. If these are suspended, then what is it that is being rescued?

It seems rather obvious to us that when citizens can no longer get their property from the banks and can no longer move their bodies and capital freely within the EU, then what is 'protected' are not they, but the solely the bankers and the political and bureaucratic elite.
Situation Not Under Control

When bank officials feel the need to state "the situation remains under control", rest assured it is 100% certain that things are not under control. Threats of capital controls and restriction of movement prove just that.

Mike "Mish" Shedlock
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