FINANCIAL TIMES: …The standard central bank response to this problem is to provide enough liquidity to solvent banks to ensure that deposit holders are always able to withdraw their money, in which case the panic is eventually supposed to subside. The ECB has done this to the full extent required; in this respect it is not possible to criticise the ECB for failing to fulfill the role of lender of last resort to the entire system. Yet the continuing drain on deposits has not been halted.
The reason for this, of course, is the fact that the eurozone is not a single nation state, even though it does have a single central bank. This has two consequences. First, the underlying fear of depositors in the periphery is not simply, or even mainly, one of bank failure. Instead, they probably fear the devaluation of their deposits relative to those in core economies if the euro should break up.
Therefore, the run is being caused by concerns about exchange rate risk, not necessarily by the fear of bank failure as such. This makes it much more complicated to deal with, since it is very difficult to offer guarantees against future exchange rate losses to today’s depositors. Germany would not want to stand behind such guarantees to Greek and Spanish citizens in the event of a euro break-up… (more)
