2011: The Year of the Bank Run?

Irish eyes are crying and it is beginning to spread

Inquiring minds are looking at a new CNN article entitled, “2011: Year of the bank run?

Is a bank run about to bring Europe to its knees?

Some market watchers say yes, pointing ominously to the torrents of money pouring out of Ireland.

Irish bank deposits declined in November for the fourth straight month, the central bank said last week. Overseas deposits fled the country at their fastest pace in more than a year.

The deposit flight compounds the stress on a financial system whose massive property-lending losses already have driven the government to accept an unpopular bailout from the European Union and the International Monetary Fund.

Worse yet, it shows that the solutions policymakers slapped together in the fall of 2008 helped in some cases to create even bigger problems — ones that are now coming due.

“…The solutions policymakers slapped together in the fall of 2008 helped in some cases to create even bigger problems…”.

Isn’t this what many analysts said back at the time? Once again, this crony-capitalism (facism) has led to disasterous results. They should not have loosened lending standards to the point of not having any back in 2003(results were predicted); and in 2008 they should have let the market correct itself (again, results predicted). If they had, we would be well on our way to recovery and the pain would not have been nearly so bad.

Now, we are in 2011, have a huge shadow inventory of homes, banks ready to fail anyway, and incredibly high unemployment…

Unconditionally guaranteeing bank deposits is just such a policy, in a country where loan losses made the banks insolvent, job loss left many taxpayers peniless and deposits now at least double annual economic output.

And this time, given the unpopularity of bailouts and dysfunctional European politics, there is ample reason to fear the banking mess won’t so easily be swept aside.

“Facing facts like these, each morning when I wake up I have to wonder, ‘Why is today not a good day for a wholesale run on the Irish banking system?'” asks Scott Minerd, chief investment officer at Guggenheim Partners. “And if there is a wholesale run on the Irish banking system, then what stops the same scenario from cascading into Portugal, Greece, Italy, and most importantly, Spain?”

Does Mr. Minerd sound a little…well, weird in quote above? How does a CEO of an investment firm throw that line out? Does Mr. Minerd realize the results of what he is talking about? One would think so.

His scenario would certainly be kaos in Europe and most likely here in the US.

Since CEO’s of investment firms aren’t known for making these kinds of statements, it would be prudent to see the data and watch this situation very carefully:

Some 20 billion euros ($27 billion) of overseas deposits fled the country in November alone, according to the Central Bank of Ireland. The level of foreign deposits has plunged 28% in the past year and is down 42% from its bubbly peak.

But don’t blame just the foreigners. Domestic deposits tumbled by 6.3 billion euros in November, in their steepest decline since August 2009.

All told, the Irish banking system’s deposit base has contracted by 15% over the past year — which isn’t making it any easier for taxpayers to keep the deeply troubled banking sector afloat.

The above data show a country and its banking system being let for greener pastures because of a lack of confidence in their near-term future. The contraction and comments above from Mr. Minerd do not bode well for Ireland specifically…and Europe generally.

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