Speaking to InvestorDaily, Perpetual head of markets research, Matt Sherwood, said €2 billion was reportedly withdrawn last week – including €1 billion on Thursday – amid fears that Greece is close to default.
“If those numbers are correct, it suggests a bank run [has] started in Greece on fears of default and fears [over] chaos enveloping the Greek financial system,” Mr Sherwood said.
This will put increased pressure on the Greek financial system and worsen the current crisis, said Mr Sherwood.
“If banks start running out of liquid cash, that can start a panic, [and] as we have seen in history those things never end well,” he said.
If a further bank run ensues, the Greek central bank will have to provide liquidity to the banking sector to meet increased withdrawal demands.
If the Greek central bank cannot provide the liquidity, “major panic will set in and that will lead to major rises in financial stress, and if things are mishandled, a meltdown of the banking sector,” explained Mr Sherwood.
The ability of the Greek central bank to provide this liquidity, particularly in the context of the country’s significant debt repayment due to the International Monetary Fund (IMF) on 30 June, is questionable.
“The Greek government is hoovering up any spare cash it can find in any government fund across Athens and all of Greece. What this tells you is that the vaults are empty,” Mr Sherwood said.
Greece is due to repay €1.5 billion to the IMF on 30 June and a further €2.5 billion to the ECB on 20 July, Mr Sherwood noted.
Negotiations between Greece and its creditors over emergency financial aid needed to make these payments are currently stalled, fuelling fears of default.
“I think it’s right to conclude that the negotiations are going very poorly,” he said.
Mr Sherwood argued that the ability of Greece’s left-wing government to broker a deal and unlock the funds is hindered by its focus on political ideology.
“My base case is that it is more likely that Greece will default to some degree on some of the debt that it owes.
“It’s more likely that [some kind of default] will occur than they will make those payments,” he said.
Mr Sherwood said the key question for markets is whether the default is orderly or disorderly.
“If it’s the latter, you will get a major rise in the volatility of markets,” he explained.
A default that is not supported by the ECB, will result in increased pressure within European equity markets, risk contagion spreading to peripheral countries, blowouts in credit spreads and losses in European banks, concluded Mr Sherwood.
