Sprott Asset Management published their monthly newsletter Market at Glance (May 2012) entitled "The Real Banking Crisis, Part II" and I'll give a summary below.
Back in July 2011, Eric
Sprott and David Baker wrote an article entitled
"The Real Banking Crisis" where they discussed
the increasing instability of the Eurozone banks suffering from
depositor bank runs. Even after numerous bailouts, the
Euro Stoxx Banks Index have fallen more than 50% from their July
2011 levels and are now in the midst of yet another breakdown led
by the events unfolding in Greece and
They explain that bank runs have started in several countries
In Greece, 1.2 billion Euros withdrawn have been withdrawn on May 14-15, 2012 and now up to 3 billions euros have left the banking systems since the May 6 elections. Greece is
now €21 billion away from a complete banking collapse, unless the European
Central Bank (ECB) provide an even bigger bailout.
Bank depositors have been pulling money out
of banks in Spain, especially the recently nationalized Bankia bank, which is the fourth
largest bank in the country. Depositors reportedly withdrew €1
billion during the week of May 7th alone, prompting shares of
Bankia to fall 29% in one day.
Deny, deny some more… panic, inject capital -
this is the typical government approach to bank runs, but the
bailouts are happening faster now, and the numbers are getting
The recent bank runs in Greece and Spain make foreign investors nervous and according to JPMorgan analysts, approximately €200 billion of
Italian government bonds and €80 billion of Spanish bonds have been
sold by foreign investors over the past 9 months, representing
more than 10% of each market.
Eric Sprott explains further that no matter what happens in the Eurozone,
the absolute worst case scenario for the authorities is a bank run, because they can spiral out of control
faster than governments can react to stop them. Bank runs also prompt banks to liquidate whatever
assets they can, revealing the truth about what their "assets" are
actually worth. But banks don't want to show the true value of their assets so for example, many Spanish banks are
avoiding property sales so they don't have to "mark to market"
We're now at the point where a bank run in one Eurozone country
could quickly seize up the entire system - not just in Greece or
Spain, but throughout the entire Eurozone and beyond, because banks are leveraged. For this reason, we'll likely see
another ECB-induced printing program announced (with a new fancy name) before a broader bank run can take root.
However, nothing is really being solved here, everyone knows it, and we're essentially in the same place we were when the crisis erupted
back in 2010, except there is now more total debt outstanding.
With increasing level of debt and interest payment, there is no way the bond market keeps pretending everything is ok in Europe,
like it currently does with the UK, US and Japan… for now. Greece and Spain Minsky moment (when you realize the debt load can't be repaid) has arrived and is coming to the whole of Europe.
Eric Sprott then says that without a doubt, the most counter-intuitive aspect of the
Greece/Eurozone debacle has been its impact on the price of Gold. The selling pressure in Gold once again appears to be
expressed primarily through the futures markets (and not physical sales), which are highly
levered and rarely involve any physical transactions involving
actual bullion. The futures market sell-off also appears to be
waning now, since the European banking crisis has provided central
banks with a politically-palatable excuse to take action if it
deteriorates any further. He further notes that China posted another record Hong Kong gold import number in March of 62.9
tonnes, for a total of 135.5 metric
tonnes between in Q1 2012, representing a 600% increase
over the same period last year.
The full version of the newsletters is available at http://sprott.com/markets-at-a-glance/the-real-banking-crisis,-part-ii/