Greece Is the Canary in the Coal Mine
This is an “Amber Alert” day in the markets.
“Greeks Line Up at Banks; ATMs Run Dry” was the headline over at the Drudge Report. Versions of it ran throughout the financial media.
Greece is the canary in the coal mine for what could one day happen to your savings.
You’ll recall our prediction: In a crisis, banks will move fast to block access to your money.
First, they will limit withdrawals. Then they will either close their doors or run out of cash.
Capital Controls Have Arrived…
That’s what’s happening in Greece right now…
The showdown going on there for months is reaching a climax.
The Greek government has announced it will put creditor demands to a popular vote.
“Hey, how do you feel about paying our national debt?” they’re going to ask the hoi polloi.
And how do you think the hoi polloi are going to respond?
The best guess is they’re going to say: Let’s not.
Which will leave the banks cut off from new funds… and short of old ones.
Smart depositors figured this out long ago. They took their money out of Greek banks. But the rest of the people are now wising up. In effect, they’re voting with their money – getting it out while they still can.
Naturally, the banks tried to protect the money that isn’t theirs. Piraeus Bank and Alpha Bank limited the amount you could take out. All you could get from a Piraeus ATM, for example, was €600 ($667).
This made people more eager than ever to get their hands on their money. Lines formed at ATMs on Saturday. One banker estimated that €110 million ($122 million) left the banks by 11:30 a.m.
Not all banks are open on Saturday. But even those that were normally open stayed shut.
And now Greek prime minister Alexis Tsipras says Greek banks will be shut, and that capital controls will be imposed, until July 7.
Greeks will only be allowed to take out a maximum of €60 ($67) a day. And they’re banned from moving their savings to accounts outside of Greece.
How Not to Manage a Bubble
The sense of panic and impending doom over the weekend was heightened, as the Chinese government took action to halt a stock market plunge.
In the last two weeks, the Shanghai Composite Index has lost 20% of its value. That’s the equivalent of the Dow losing 3,600 points. It’s the kind of thing that makes investors nervous. Or desperate.
If that happens in the U.S. – which it surely will – you can bet your bippy that the feds will intervene. The Chinese are doing the same. They’ve just cut the central bank lending rate to the lowest level ever.
Will that do the trick?
From John Rubino at DollarCollapse.com:
China, meanwhile, has spent the past couple of decades directing an infrastructure build-out that in retrospect was maybe twice as big as it should have been.
Now it’s fiddling with all kinds of imperfectly understood fiscal and monetary levers, trying to maintain a 7% growth rate that is looking more and more fictitious.
Here again, the best way to deal with a bubble is to not let it happen in the first place. The second best way is to let it pop and allow the market to clean up the mess.
The absolute wrong way to manage a bubble is to intervene from the top to keep it going. Look where that has gotten Japan and the U.S.
Stay tuned for more exciting developments…
Further Reading: The freezing of accounts in Greece is only a taste of what’s to come… As Bill has been warning, right now in America, the highest levels of government and the banking system are locked in a desperate last stand against a disturbing monetary shock… one that will make what’s happening in Greece seem mild by comparison.
Investors Are Relatively Calm over Greece
Investors in European assets are holding their nerve…
So far at least, there’s no sign of outright panic over a Greek debt default.
The euro has fallen 0.4% versus the dollar since Friday’s close. At writing, one euro buys $1.11.
But that’s still above the euro’s low against the dollar of $1.05 reached in March.
And there’s little sign that bondholders in other highly indebted European countries see much risk of contagion from a Greek default.
In 2012, the last time the European sovereign debt crisis was in full swing, yields on Spanish 10-year debt peaked at 7.6%… yields on Italian 10-year debt peaked at 6.6%… and yields on Portuguese 10-year debt peaked at 17.4%.
Yields move in the opposite direction to bond prices. A spike in yields shows that investors are becoming worried that the value of the bonds they are holding will fall.
And in the case of bonds of the so-called “PIGS” – Portugal, Italy, Greece, and Spain – those worries center on the risk of governments in those countries defaulting.
But, as you can see from the table above, with the exception of Greece, European bond yields are nowhere near crisis levels.
For now, at least, bondholders don’t see the problems in Greece spreading to other European nations.