Spanish depositors withdrew nearly $100 billion in July, more than double the existing record for one month. The jump in withdrawals was likely driven by households joining corporations in the flight to safety. The Spanish Central Bank says the spike was due to the “July effect of tax payments and by the expiry of securitized funds,” but the Spanish Central Bank has zero credibility after their bogus stress-tests. The system still has roughly $2.9 trillion in deposits according to Morgan Stanley, but that will not be able to withstand an accelerating run on banks without ECB support.
This will be a race for the ECB. During the ECB’s meeting on September 6th, markets and critically, depositors, will be watching for actions that support eurozone member-states. Bond purchases are the key action that will buy time to allow for economic recovery, but they cannot be limited. It’s too late for that.
While we do expect an announcement around bond purchases, we will focus on measuring the extent of program. Limited support cannot plug monthly losses of $100bn in member-states’ balance sheets. Purchases need to be messaged to the market as unlimited, something we doubt the ECB will do because the politicized nature of ECB negotiations.
Domestic politics are such that any bond purchases will alienate German and Dutch voters. If the ECB is set to launch a bond-buying program, it is better off going all the way as it may not get another chance. You can imagine a scenario where electorates in the creditor states put the program to a vote as a way to stop the flow of funds to debtor states. We hope the ECB can take bold action in light of domestic political realities, but they have yet to take bold action at any point during the crisis.
Watch for Europe to waste another opportunity to slow the crisis and instead continue to kick the can down the road.