By Tim Worstall, Forbes

It’s long been true that there are three potential outcomes to the current Greek debt crisis. Everyone kisses and makes up and a deal is reached on the second and then third bailouts. This has long been the most likely outcome given the European Union’s distaste for the idea that the union and the euro is anything other than an irreversible and highly desirable development. 

The second is that the Greek government (or, more unlikely, everyone else) says the heck with it, this just isn’t worth it, and thus there’s default and potentially exist from the euro. The third and the one becoming ever more likely, is that events force peoples’ hands. For while we like to think that governments control thingsmarkets are in fact more powerful. Markets being only the aggregate influence of our own actions of course.

As an example, if the population of Denmark decide to take a walk into Schleswig Holstein one afternoon there’s absolutely nothing at all that the Danish or German governments can do about it whatever the results of the 19th century wars over the area. I don’t for a moment suggest that anything like that might happen, only offer an example of the way in which our aggregate actions can beat any government in extremis.

And that’s the third problem in Greece. If the population pulls all of its money out of the Greek banks then those banks will be, obviously, bust. This is simply the way that fractional reserve banking works, banks borrow short and lend long. So, if everyone turns up demanding their money today the banks cannot get back the money they’ve lent out. Currently the gap between what the banks have as deposits and what they’ve lent out is covered by the Emergency Lending Assistance (ELA) from the European Central Bank (ECB). This amount is spiraling ever upwards and the limit that is allowed is being continually increased. However, the ECB is only allowed to do this if the banks are illiquid: that is, if it really is just the fractional reserve banking stuff that is causing the problem. If they are insolvent (which, if we’re honest, they are but they’re not for political reasons) then this isn’t supposed to happen.

Which is where our problem comes in. If the Greek populace continue to take their money out then the banks really will be insolvent, not just illiquid however much we politically squint at it all. And that is what seems to be happening. We’re not seeing lines at the banks as yet, but the cash withdrawal is gathering pace:

With time fast running out to secure a desperately needed €7.2bn in new rescue funds before the end of the month, when Athens is due to repay €1.5bn in loans to the International Monetary Fund, anxious Greeks have begun withdrawing money from their country’s banks at an unprecedented rate.

Bank deposits have been falling steadily since October and now stand at their lowest level since 2004. Withdrawals in recent weeks have averaged €200-250m a day, but on Monday – after the shock collapse of last-ditch talks between the Greek government and its eurozone and international lenders – withdrawals surged to €400m.

The point about bank runs is that you cannot predict them and if they do happen then, by definition, they happen with breath taking speed. And if it does happen then there’s little that the assembled governments can do about it. Or at least they will be forced into making some very uncomfortable decisions, something they’ve rather been avoiding so far. The ECB would have to decide whether to breach its own rules and continue to support the Greek banks. If that’s a no, then the only way that Greece can continue to have a financial system at all is for the Greek government to support them. And they don’t have access to the euros necessary to do that: the ECB is the money issuer inside the eurozone, not the Bank of Greece or the Greek government. So, that means that the only possible method of support is a new currency. At which point of course Greece is out of the euro.

Please note that I’m not saying that a bank run is going to happen, that one is inevitable. Only that if one does happen then it’s going to force everyones’ hands. And that’s the third possible outcome. Instead of either Greece or the eurozone making a considered decision, the markets, that’s us in effect, make it imperative that a decision must be made.

But that was Monday. On Tuesday we had the Greek prime minister, Tsipras, telling parliament the following:

Greek prime minister Alexis Tsipras escalated his defiance towards the country’s official creditors, with a pointed attack on the International Monetary Fund, accusing the institution of “financial asphyxiation”.
In a firebrand speech to his parliament, Mr Tsipras said the IMF bore “criminal responsibility” for his country’s cash crisis.
“The fixation on cuts…is most likely part of a political plan…to humiliate an entire people that has suffered in the past five years through no fault of its own,” said Mr Tsipras.

Maybe that’s just political rhetoric but what’s the effect on the people with money in those banks? Likely to make them think that a deal can still happen or not? And that’s not the only claim that Tsipras made:

What did we learn from Tsipras’ firebrand speech?
• IMF has a criminal responsibility for Greek situation
• The real negotiations are starting now
• Lenders want to humiliate Greece
• Lenders are using negotiations to show their force, we are negotiatiating in good faith
• ECB insisting on line of financial strangulation
• Insistence on further cuts is politically motivated
• Need more on debt relief before consider cuts to pensions

Again, whether it’s domestic rhetoric or not, what’s the likely effect on those considering whether to get their savings out of the banks or not? My own impression is that it’s not exactly going to make people think that the odds on a deal have just risen, to put it mildly.

My long standing position has been that Greece will be better off outside the euro, with a new drachma, and in default on that staggering debt burden. The transition will not be amusing or easy, but growth would quickly return as the currency devalues. However, that transition would be a great deal less painful if it was actually planned and organised, rather than happens in chaotic manner as the banks fall over. Better to leap over the cliff deliberately than to stumble off the edge.