| August 14, 2012 | 0 Comments

A spreading bank run could hasten Greece’s exit from the euro zone but it certainly doesn’t have to end that way. It is far less clear what the impact would be should the wave of withdrawals accelerate in other peripheral states such as Spain or Portugal, which are further from outright revolt over German-led austerity, and which, due to their sheer size, will enjoy a vastly improved negotiating position. Greeks have been withdrawing hundreds of millions of euros of deposits from their banks in recent days, driven by a rational but dangerously self-reinforcing fear that a Greek exit from the euro will leave them holding far less valuable new drachma. That fear, though, is predicated on a shaky notion: that the players in the drama will do what they have said they would. Greek depositors are worried that their politicians will repudiate the terms of the bailout and that the ECB and European authorities will, ultimately, cut them off, either directly or by refusing to accept dubious collateral in exchange for fresh euros. That would bring down the Greek banking system, or most of it, and force Greek authorities to impose capital controls. Cue Spanish, Italian and Portuguese depositors, who might follow suit and start to withdraw their own deposits, putting massive amounts of collateral into the hands of the ECB and their own central banks. The betting on this one comes down to whether you think European officials will stick with their principles or act in their own best

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