In yesterday's post, I tentatively expressed some scepticism about the idea that the credit situation in Greece, Ireland, and Portugal represents a major threat to economies outside of these three countries (I don't dispute that they themselves are in a lot of trouble). The best rejoinder came from commenter "James", who argued:
I think the danger of contagion comes from bank runs.A corralito was the name give to Argentina's practice in its 2001 financial crisis of preventing withdrawals from bank accounts. James goes on:
Lets say that Greece goes the way of Argentina, finally capitulates, and decides to withdraw from the EMU. The first thing they have to do is impose a Corralito.
This is devastating for a society. Imagine waking up one morning and finding that you have 1/3rd the savings that you had when you went to bed the night before.I'm sceptical, but let's take a look at these countries (all data in this post from Eurostat). Firstly, if you are willing to add Spain and Italy to your list of serious concerns, then you are now up to about a third of the Eurozone, so there's definitely potential for a big economic impact:
So the Irish and the Portuguese will see this and rush to their banks to withdraw their savings so they can put them someplace safe. That will leave the governments of Ireland and Portugal no option but to impose Corralitos of their own. Then Spain will undoubtedly be the next domino. (I believe Spain is in worse shape then is generally recognized - Spain had a housing bubble every bit as big as the US but has the Spanish banks have been essentially hiding the problem by not foreclosing on delinquent borrowers.)
After Spain has imposed its Corralito, then the banks runs will begin in earnest in Italy.
Here's the recent trend of GDP in those countries:
Both have started to experience some recovery, but weaker in Spain than Italy. In terms of unemployment (from this post), Spain looks terrible in the wake of its housing bubble and crash:
However, I'm not persuaded that government finances are bad enough in either of these countries for there to be any imminent risk of sovereign default. James bank-run contagion theory relies on the idea of weak sovereign finance. A state in reasonable shape does not face serious risk of runs on its banks because it has options like that in Sweden in the nineties (nationalize the banks, recapitalize as needed, and then sell them off again when things improve), or the US in 2008 (loan the banks enough money to tide them over and then structure interest rates so that they can earn their way out of trouble). In neither case were bank depositors seriously hurt, and in neither case were there serious bank runs by those depositers. It's only if the state itself is financially weak that it has few options to deal with weak banks.
This next chart shows the trajectory of government deficit and total debt for five countries. In each case the data start in 1999 and end in 2010, and the 2010 end is the one down and to the right.
Look first at Germany (purple), which has been running moderate deficits of a few percentage points most of the time, and its debt has gradually drifted up over 80% of GDP. This is not a seriously scary level and Germany is generally regarded as an excellent risk and pays low interest rates. On the other end of the scale, look at Greece (red) which, in addition to having a seriously depressed economy has accumulated debt of 140% of GDP and is running deficits of 10-15% of GDP each year. Or Ireland (turquoise), which was doing fine until it decided to take on the liabilities of all its banks when the bubble burst, and since then has been accumulating truly awe-inspiring deficits that have undermined confidence in the Irish state.
By contrast, Spain was paying down its debt to a low level through much of the 1990s, and although it has run biggish deficits since the great recession, public debt is still only up to 60% of GDP, increasing at about ten percentage points per year. Thus, while Spain is very likely in for a period of extended economic pain and high unemployment, it would seem that the Spanish government is not going to run out of room to maneuver for quite a number of years. Likewise Italy, which has fairly high debt, but quite moderate deficits and where the economy is beginning to recover with unemployment not that high.
This is reflected in the interest on 10 year bonds (data for May 2011), where Spain and Italy have to pay a percentage point or two more than France or Germany, but nowhere near the levels of Greece or
So I find it implausible that serious bank runs would spread into Spain and Italy any time soon, and therefore implausible that the crisis would become a continent-wide economic disaster.