Euro zone bank safety net leaves holes unplugged

Tue May 29, 2012 5:07am EDT
 
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By Paul Carrel and John O'Donnell

FRANKFURT/BRUSSELS (Reuters) - As the euro zone ponders a possible Greek exit, policymakers have not yet built a shield robust enough to prevent a bank run in one country sending others in the bloc deeper into crisis.

A push by the European Central Bank for the euro zone to stand behind struggling lenders is slowly gaining traction with government leaders but the bloc has yet to build backstops to prevent, or cope with, a sudden collapse of confidence in banks.

Last week, European leaders discussed pan-European means of supporting banks, measures the ECB hopes will include a bank resolution fund to deal with the fallout from the wind-up or restructuring of a failing lender.

Such a body would complement the 1 trillion euros of 3-year credit the ECB has lent in recent months to banks across the 17-country euro zone, which has helped oil the wheels of Europe's banking system where confidence is so low that most remain reluctant to lend to one another.

But a wave of withdrawals by depositors - either for fear that their government is too weak to stand behind its banks or that their country will exit the euro and switch their savings into a vastly devalued national currency - would represent a whole different scale of crisis.

Such pressure on Ireland's banking system prompted a national bailout by the International Monetary Fund and European Union.

Now investors are worried about the contagion effect a Greek exit from the euro zone could have on savers in other countries.

"Preventing bank runs in Italy, Spain and Portugal should be the top priority," said Berenberg Bank economist Holger Schmieding. "Policymakers need to make sure that the potential Greek precedent of a forced conversion of domestic euro deposits into a weak new currency would not spark a run on banks ... elsewhere."   Continued...