Greece Faces the Threat of a Bank Run

As Greece’s new government struggles with the EU to determine the fate of their debt, businesses and citizens are worried that the country will default and be forced to withdraw from the European Union. As explained in this article, smart people are taking their savings out of Greek banks so that they will still have Euros to spend if Greece should be forced to revert to the its own currency, possibly issuing the drachma once again.

With uncertainty clouding the immediate outcome, cash is likely to keep pouring out of Greek banks over the next few days. About 70 percent of the outflows can be attributed to Greek corporate accounts. And most of that is rushing out of the country via electronic transfers to bank accounts elsewhere in the euro zone, Switzerland or the United Kingdom.

But many Greek citizens—who account for about a third of the deposit outflow—seem to be taking their cash out of the bank and placing it in safe deposit boxes or even just taking it home and literally stashing it under their mattresses. Burglaries, not surprisingly, are on the rise.

Runs banks are self fulfilling prophesies that can quickly turn into death spirals.  Let’s say that 2 percent of the population worry that their money is at risk, so they go to the bank and start withdrawing all their cash.  They line up at tellers and ATMs.  People whoa re not concerned see this and wonder “Hmm, maybe I should be worried.” They decide to take some of their money out, just in case.  This leads to longer lines and to empty ATM machines, which causes even more people to worry.  In a matter of a few short days, banks run short of cash and have to limit withdrawals, which in turns creates more panic.  Before long, everyone wants to withdraw their money, but not only is their a shortage of cash, but the banks in a failing economy don’t have the credit they need to borrow more and they cabn;t liquidate their assets fast enough to cover the withdrawals.  They have no FDIC to reassure small savers, and the government can’t come to the rescue with Euros because it has none.  We may see this recipe for disaster in Greece over the next few days.

How can you protect yourself in a similar situation?  The key is to be early; make your withdrawal or transfer funds before the banks or the government puts in place rules, regulations and restrictions.  Here are other suggestions:

  • Have cash on hand to weather a bank holiday or other period in which you cannot access your money.  Keep in mind that your credit cards, debit cards and other electronic payment methods my be “turned off” in an economic collapse.
  • Have some assets such as real estate, precious metals or hard goods that will retain their value regardless of the currency of the day.  The ultra rich often invest in art, knowing they can auction it off to raise millions in whatever currency they want.  We many not be able to afford that, but you can tuck away some silver coins, gold, or investment grade gemstones.
  • Don’t rely on a bank’s safe deposit boxes as they may restrict access or governments may even try to confiscate goods.  Buy a safe, lease a vault from a non-bank third party, or take other actions to protect your valuables.
  • Have goods you can use for barter.  At a time when no one wants to accept your cash — be it Euros, dollars or drachmas — your goods can be traded for other goods or services, sold for sold or silver, or sold after the situation has stabilized.  (There are plenty of online lists of things for battering, including medicines, guns and ammo, alcohol, tobacco, coffee, batteries, fuel, health and beauty items, etc.  In general, you want things that will not deteriorate, spoil, or lose value over time.)
  • If you have significant assets, invest in a diversified portfolio of stocks of large, global companies that are likely to weather a localized economic disaster.  Your share of the company will have value regardless of what currency it is denominated in. And even if your country’s stock market closes down a global company may trade on other bourses.

Most importantly, learn from the past.  Keep an eye on what happens in Greece and watch for warning signs.  Fortunes can be made and lost when an economy collapses; Take steps to come out on the positive side.

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