Eric Sprott: The Real Banking Crisis, Part II

Tyler Durden's picture

From Eric Sprott and David Baker of Sprott Asset Management

The Real Banking Crisis, Part II

Here we go again. Back in July 2011 we wrote an article entitled "The Real Banking Crisis" where we discussed the increasing instability of the Eurozone banks suffering from depositor bank runs. Since that time (and two LTRO infusions and numerous bailouts later), Eurozone banks, as represented by the Euro Stoxx Banks Index, have fallen more than 50% from their July 2011 levels and are now in the midst of yet another breakdown led by the abysmal situation currently unfolding in Greece and Spain.



Source: Bloomberg

On Wednesday, May 16th, it was reported that Greek depositors withdrew as much as €1.2 billion from their local Greek banks on the preceding Monday and Tuesday alone, representing 0.75% of total deposits.1 Reports suggest that as much as €700 million was withdrawn the week before. Greek depositors have now withdrawn €3 billion from their banking system since the country's elections on May 6th, seemingly emptying what was left of the liquidity remaining within the Greek banking system.2 According to Reuters, the Greek banks had already collectively borrowed €73.4 billion from the ECB and €54 billion from the Bank of Greece as of the end of January 2012 - which is equivalent to approximately 77% of the Greek banking system's €165 billion in household and business deposits held at the end of March.3 The recent escalation in withdrawals has forced the Greek banks to draw on an €18 billion emergency fund (released on May 28th), which if depleted, will leave the country with a cushion of a mere €3 billion.4 It's now down to the wire. Greece is essentially €21 billion away from a complete banking collapse, or alternatively, another large-scale bailout from the European Central Bank (ECB).

The way this is unfolding probably doesn't surprise anyone, but the time it has taken for the remaining Greek depositors to withdraw their money is certainly perplexing to us. Official records suggest that the Greek banks only lost a third of their deposits between January 2010 and March 2012, which begs the question of why the Greek banks have had to borrow so much capital from the ECB in the meantime.5 Nonetheless, we are finally past the tipping point where Greek depositors have had enough, and the past two weeks have perfectly illustrated how quickly a determined bank run can propel a country back into crisis mode. The numbers above suggest there really isn't much of a banking system left in Greece at all, and at this point no sane person or corporation would willingly continue to hold deposits within a Greek bank unless they had no other choice.

The fact remains that here we are, in May 2012, and Greece is right back in the exact same predicament it was in before its March 2012 bailout. Before the bailout, Greece had approximately €368 billion of debt outstanding, and its government bond yields were trading above 35%.6 On March 9th, the authorities arranged for private investors to forgive more than €100 billion of that debt, and launched a €130 billion rescue package that prompted Nicolas Sarkozy to exclaim that the Greek debt crisis had finally been solved.7 Today, a mere two months later, Greece is back up to almost €400 billion in total debt outstanding (more than it had pre-bailout), and its sovereign bond yields are back above 29%. It's as if the March bailout never happened… and if you remember, that lauded Greek bailout back in March represented the largest sovereign restructuring in history. It is now safe to assume that that record will be surpassed in short order. It's either that, or Greece is out of the Eurozone and back on the drachma - hence the renewed bank run among Greek depositors.

Meanwhile, in Spain, bank depositors have been pulling money out of the recently nationalized Bankia bank, which is the fourth largest bank in the country. Depositors reportedly withdrew €1 billion during the week of May 7th alone, prompting shares of Bankia to fall 29% in one day.8 The Bankia run coincided with Moody's issuance of a sweeping downgrade of 16 Spanish banks, a move that was prompted over concerns related to the Spanish banks' €300+ billion exposure to domestic real estate loans, half of which are believed to be delinquent.9 The Spanish authorities were quick to deny the Bankia run, with Fernando Jiménez Latorre, secretary of state for the economy stating, "It is not true that there has been an exit of deposits at this time from Bankia… there is no concern about a possible flight of deposits, as there is no reason for it."10 Funny then that the Spanish government had to promptly launch a €9 billion bailout for Bankia the following Wednesday, May 24th, an amount which has since increased to a total of €19 billion to fund the ailing bank.11 Deny, deny some more… panic, inject capital - this is the typical government approach to bank runs, but the bailouts are happening faster now, and the numbers are getting larger.

The recent bank runs in Greece and Spain are part of a broader trend that has been building for months now. Foreign depositors in the peripheral EU countries are understandably nervous and have been steadily lowering their exposure to Eurozone sovereign debt. According to JPMorgan analysts, approximately €200 billion of Italian government bonds and €80 billion of Spanish bonds have been sold by foreign investors over the past nine months, representing more than 10% of each market.12 The same can be said for foreign deposits in those countries. Citi's credit strategist Matt King recently reported that, "in Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks."13 Spain and Italy are not immune either, with Spain having suffered €100 billion in outflows since the middle of last year (certainly more now), and Italy having lost €230 billion, representing roughly 15% of its GDP.14

As we've stated before, no matter what happens in the Eurozone, the absolute worst case scenario for the authorities is a bank run. It terrifies all involved, because they can spiral out of control faster than governments can react to stop them, save for the most Draconian measures. They also prompt banks to liquidate whatever assets they can, revealing the truth about what their "assets" are actually worth. In this environment, no one wants to find out what the market will really pay for them. We're seeing this now in Spain, where according to Bloomberg, "Many Spanish banks are avoiding property sales so they don't have to "mark to market" valuations. Instead, they're giving developers new loans to pay debt coming due to prevent defaults."15 Sound familiar? We're now at the point where a bank run in one Eurozone country could quickly seize up the entire system - not just in Greece or Spain, but throughout the entire Eurozone and beyond. Greek and Spanish banks are just like all the others; they operate with leverage ratios averaging 25x their equity capital. They are all so overleveraged that it takes very little in deposit withdrawals to cause instantaneous liquidity issues. This is why we'll likely see another ECB-induced printing program announced (with a new abbreviation, hopefully) before a broader bank run can take root. The Eurozone authorities simply cannot risk the consequences of bank runs in countries like Spain, Portugal or Italy, which are far too big to bailout for the over-stretched ECB. It's not about Greece staying or leaving the European Union anymore, it's about the bailout ability of European banking system to survive the impact of massive money transfers.

Nothing is really being solved here, and everyone knows it. We're essentially in the same place we were when the crisis erupted back in 2010, only now there's more total debt outstanding. Bank of Canada Governor Mark Carney remarked in a December 2011 speech that "the global Minsky moment has arrived", and it's now plain for all to see.16 The "Minsky moment" refers to the work of Hyman Minsky, a deceased American economist who developed theories on how debt accumulation eventually leads to financial crises. You don't have to be an economist to understand the crux of Minsky's theories. As an economy grows it takes on increasing amounts of debt. The point eventually comes when the cost of servicing that debt can no longer be met by that economy's productive capacity - that's the Minsky Moment, and we're watching it play out all over the world today. When Greek bond yields spiked back in February 2012, bond investors looking at the country's €368 billion of debt outstanding, its population of 11 million people, and its nominal GDP of $312 billion realized that it couldn't possibly work. There was no way Greece could pay the interest on its debt load. There was no way the bond market could keep pretending everything was ok, like it currently does with the UK, US and Japan… for now.

Greece clearly needs another large-scale bailout, and we think they'll get one. Greece's exit from the Eurozone represents a Lehman-like scenario to the global banking system - why wait to see what carnage it will unleash? It's always easier to print money, and printing another couple €100 billion is nothing compared to the trillions that have been printed since last November. Where this will get tense, however, is when the market acknowledges the Minsky moment in a larger EU economy, like Spain or Italy. As we go to print, Spanish bond yields are now trading back above 6.5%, signaling the market's non-confidence in the country's ability to back-stop its own banking system. Spain has a population of 47 million, a GDP of roughly $1.3 trillion, national debt of roughly $1.1 trillion, debt owed to the ECB and various bailout funds totaling €643 billion, and now, a banking system that also appears close to collapsing.17 Their Minsky Moment has already arrived, and it's simply a matter now of how the market will react to it, and how long it takes the ECB to come to Spain's rescue.

Without a doubt, the most counterintuitive aspect of the Greece/Eurozone debacle has been its impact on the price of gold. Gold is now back below $1600 for the third time since August 2011; each time has coincided with severe banking stress within Greece and the broader Eurozone. Some pundits have suggested that various European banks are selling gold to raise liquidity, and this would make sense if the Eurozone banks had gold to sell, but we cannot find any evidence of large physical sellers out of Europe. Also, ever since the unlimited US-dollar SWAP agreement was launched in November 2011, USD liquidity has not been the key issue in Europe - rising sovereign bond yields and deposit withdrawals have. On the contrary, the selling pressure in gold once again appears to be expressed primarily through the futures markets, which are highly levered and rarely involve any physical transactions involving actual bullion. The futures market sell-off also appears to be waning now, since the European banking crisis has provided central banks with a politically-palatable excuse to take action if it deteriorates any further.

The recent gold price has been particularly frustrating given the continuation of bullish demand trends out of China. China posted another record Hong Kong gold import number in March of 62.9 tonnes. Gold imports into China have now totaled 135.5 metric tonnes between January and March 2012, representing a 600% increase over the same period last year.18 We don't have to connect the dots here - China is stockpiling the precious metal while investors in the West scratch their heads wondering why the spot price is so low.

Source: UBS, Bloomberg

Non-G6 central banks have also continued to accumulate physical gold, with the latest reports revealing another 70 tonnes of gold purchases completed in March and April by the central banks of Philippines, Turkey, Mexico, Kazakhstan, Ukraine and Sri Lanka.19 We won't bore you with the exercise of annualizing those numbers and comparing them to the annual global mine supply, but suffice it to say that the fundamentals still remain firmly intact. It's now simply a matter of improving sentiment towards gold in the West, and if the current banking crisis in Europe gets any worse, or if we see another large-scale policy response, it will likely happen on its own accord.

Although the last eight months have not played out the way we would have expected for gold, they have played out the way we envisioned for the banks. The question now is how long this can go on for, and how long gold can remain under pressure in a banking crisis that has the potential to spread beyond Greece and Spain? So much now rests on the policy responses fashioned by the US Fed and ECB, and just as much also rests on what's left of European citizens' confidence in their local banking institutions. Neither of these things can be precisely measured or predicted, but we continue to firmly believe that depositors in Greece and Spain will choose gold over drachmas or pesetas if they have the foresight and are given the freedom to act accordingly. The number one reason we have always believed gold should be owned, and why we believe it will go higher, is people's growing distrust of the banking system - and we are now there. We will wait and see how the summer develops, and keep our attention firmly focused of the second phase of the bank run now spreading across southern Europe. 

1 Hope, Kerin and Wigglesworth, Robin (May 16, 2012) "Greek banks see steady deposits outflow". Financial Times. Retrieved May 22, 2012 from:
2 Smith, Helena and Treanor, Jill (May 16, 2012) "Greeks withdraw €3bn in 10 days since election". The Guardian. Retrieved May 22, 2012 from:
3 Rueters (May 28, 2012) "Greece Pours $22.6 Billion Into Four Biggest Banks". Reuters. Retrived May 29, 2012 from:
4 Paris, Costas and Paris, Jenny (May 22, 2012) "Former Greek PM Papademos: Risk of Greece Leaving Euro is Real". Dow Jones. Retirved on May 23, 2012 from:
5 Smith, Helena and Treanor, Jill (May 16, 2012) "Greeks withdraw €3bn in 10 days since election". The Guardian. Retrieved May 22, 2012 from:
6 Becatoros, Elena and Steinhauser, Gabriele (March 9, 2012) "Greece secures biggest debt deal in history" Associated Press. Retrieved May 20, 2012 from:
7 Reuters (March 9, 2012) "Sarkozy says Greek problem solved". Reuters. Retrieved May 20, 2012
8 Vigna, Paul (May 17, 2012) "Whatever You Do, Don't Say 'Bank Run'". Wall Street Journal. Retrieved May 22, 2012 from:
9 Reuters (May 17, 2012) "Moody's cuts Spanish banks ratings". Reuters. Retrieved May 22, 2012 from:
10 Johnson, Miles (May 17, 2012) "Spain denies bank run reports". Financial Times. Retrived May 20, 2012 from:
11 Giles, Ciaran and Woolls, Daniel (May 28, 2012) "Spanish PM adamant bank sector won't need European Union as Bankia shares plunge". The Associated Press. Retrieved on May 28, 2012 from:
12 Milne, Richard (May 23, 2012) "Bond exodus on a par with eurozone bank run". Financial Times. Retrieved on May 24, 2012 from:
13 Field, Richard (May 21, 2012) "Citi's Matt King on deposit flight likely to pick up speed in the EU". Trust Your Instincts Blog. Retrieved on May 24, 2012 from:
14 Milne, Richard (May 23, 2012) "Bond exodus on a par with eurozone bank run". Financial Times. Retrieved on May 24, 2012 from:
15 Smyth, Sharon and Callanan, Neil (May 29, 2012) "Spain Delays And Prays That Zombies Repay Debt: Mortgages". Bloomberg. Retrieved on May 29, 2012 from:
16 Carney, Mark (December 12, 2011) "Growth in the Age of Deleveraging". Bank of Canada. Retrieved on May 20, 2012 from:
17 Taylor, Anthony (April 19, 2012) "Spanish Debt as at April 19th 2012 vs GDP". British American Marketing. Retirved on May 20, 2012 from:
18 Bloomberg News (May 8, 2012) "China's Gold Imports Jump As Country May Become Biggest User". Bloomberg. Retrieved on May 20, 2012 from:
19 Williams, Lawrence (May 25, 2012) "Central Banks boost gold holdings yet again". Mineweb. Retrieved on May 26, 2012 from:

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phungus_mungus's picture

Slow motion train wreck....

Lets get this thing over with!!!!!


CommunityStandard's picture

It really is.  The end could be years away, and there'll be a new "The End Is Coming" article for me to read daily until the end finally does come.

SilverTree's picture

"Greece clearly needs another large-scale bailout" No, no they don't!

MisterMousePotato's picture

Years away? It took approximately four centuries for the Roman Empire to collapse. My gut feeling is that Rome could have held things together longer today with today's police state technology, superior firepower concentrated in the hands of the state, greater resources to pacify the population, etc. Honestly, can anyone really picture Vienna getting sacked by barbarians in this day and time?

Colombian Gringo's picture

The real banking crisis is that criminals like corzine are drinking champagne while millions of americans are living on food stamps.

DoChenRollingBearing's picture

@ Community

+ 1


I hear you, I expected this to be over by now back in 2007 and 2008.

seek's picture

In spite of the other headline article being "The End Game: 2012 and 2013"... I'm still thinking the window is 2015-2018. They're amazingly good at kicking the can.

In retrospect I think we should have expected this downward staircase of disaster with each little quantum jump down. Nevertheless, I do think we see a singular event that results in the entire populations of first, second, and third-world countries recognizing we're in a new financial and likely political reality.

I did read an article that made a very good point a month or so ago: commerce will continue, no matter what type of market remains to conduct it in, it's just that we will see a re-ordering of banking and likely political structures when this thing finally breaks.

RoadKill's picture


I was going to write something similar in the other doomer post.

Commerce will find a way.

Their will be bank runs and bankrupcies in Europe, followed by bailouts. Then their will be government defaults. And deflation. And stocks will fall significantly AS WILL GOLD and other commodities.

But their will be times to buy, followed by times to sell, much like the Nikkei over the last 20 years.

A new generation of Kennedies will arise and I hope to be one.

Bizaro World's picture

You'll need a catchier name...

StychoKiller's picture

"It's as if the March bailout never happened… and if you remember, that lauded Greek bailout back in March represented the largest sovereign restructuring in history."

A black hole has such massive gravity, that even light can't escape from it, nevermind such particles as Zeuroes!

MendozaErika's picture

my friend's mother makes $82 every hour on the computer. Se­tu­p a f­r­e­e a­cc­ou­nt on www.LazyCash9.Com

DoChenRollingBearing's picture

Junked for being even more of a pest than I am.

PersonalResponsibility's picture

Junked because you are not a pest.  I look forward to reading what you write.  Nice way for me to point it out, eh?

GeorgesamaBushLaden's picture

My enemy's brother's step daughter earns $10K every minute making risky derivatives bets for JP Morgan...

Josh Randall's picture

Sprott is the man - Gold and Silver will win in the end, if you're looking for a timeline, you're throwng darts at a board, but the end has already been determined and guys like Sprot will cash in in the end guaranteed

Caviar Emptor's picture

The sun is moving back into Gold's astrological sign. Sprott mentions distrust of the banking system as a driver for gold. Yes. But there's more. The instability of the global monetary system trumps even that

disabledvet's picture

outside of Europe (which "happens" to be a CURRENCY UNION) where hell does this exist?

Treason Season's picture

"The sun is moving back into Gold's astrological sign"

Link, please.

narnia's picture

He has an article explaining the deflation induced by bank runs, then seemingly forgets what he's written when talking about gold. Gold is not immune to massive changes in credit.

The Spaniards & Italians aren't dumb. They're transferring their balances to countries with EUR liquidity. The people who cannot or don't have material enough balances are taking their balances out in notes. If the Greek depositors get hosed, these folks will drain the EUR liquidity of the so-called core within hours.

Haole's picture

I always find it interesting how guys like Sprott, who I have great respect for by the way, go on about global banking collapses, gold and silver being the only safe havens, etc.  Yet, look at all the "products" offered by Sprott to skim 2.5% + 10% of performance over index (if applicable) out of "investors'" portfolios in the meantime until the time (and likely thereafter) the whole thing comes undone.  I just find it disingenuous is all but a guy's got to make a living I guess... 

PHS.U has been my biggest (as of yet) unrealized loss ever, partly thanks to Sprott himself dumping lord knows how many units a while back to take advantage of price and premium, so I take even Eric (along with the entire KWN crowd, etc.) with much more than a grain of salt.

One must look after themselves because nobody else is going to do it for one, least of all guys like Sprott.

flying dutchmen's picture

they should let all the banks collapse... WHY  ... Bankia CEO figured he was worthy of a 14 million severance ( about 300 times the average annual income) for 1) lying about the financing strength 2) leveraging the shit out of the balance sheet--- He of course did not get it, but the whole banking system is like this.  you could pick people off the street and  a few would do better.

reader2010's picture

Get Zhang Ziyi instead.  She's at $1million a pop with those top Party Bosses. Much better return.

barliman's picture


Interesting, well documented ...

... and completely useless analysis of gold demand and supply.  Eric really needs to target for this type of piece. It would do a lot more good on that website than it can here.


flying dutchmen's picture

Sprott has basically become a big resource bet --- the hedge fund has no hedge.  austerity is going to crush the performance (even more then current)

TrillionDollarBoner's picture

Yep, everyone in Europe is baying for austerity now. Can't get enough of it. Gold and silver are doomed. 

LawsofPhysics's picture

Correct, when the game is rigged and it becomes victory by attrition in a game where there can only be one winner, you know the house wins. Hedge funds learning just how small the club can get when all the counterparty risk associated with creating capital and not creating anything of real value comes home to roost. Fucking bring it!

dragoneyes74's picture

I know this is simplistic, but I think the pressure on gold is simply from its historic inverse relationship to the dollar, which is only rising because of the trouble in Europe.  I expect it to continue to sell-off until QE3 happens, and whatever bottom is formed will be the bottom forever.  I also think June is too early, so the bottom will probably be close to 1400 with silver around $19.   If so, watch for a nasty sell-off on Bernanke Day in June.  

disabledvet's picture

gold does GREAT when interest rates on GOVERNMENT debt soar. In other words "if the government has free money it can be a mining company, too." Probably a much better one than what we have right now i might add. As it is "they're stuck with mining for gold in space"...should they wish it of course. Interestingly "the private sector might give it go first." Sounds like a good plan actually. If I were the government i'd be rounding up the seed capital "beyond just NASA" right now. Not that that billion dollar contract to start "throwing payloads hither and yon" isn't chump change of course. Two thumbs up for Space X and Morgan Stanley!

RoadKill's picture

No the pressure on gold is due to deflationsry pressures arising from the EU recession and the wind down of LTRO inflationary pressure.

Deflation hits the US next due to the budget cliff. Global recession in 2013. SPX 700 Gold 600.

If TPTB are going to stock up on gold you can believe they want to drive the price down first. Same with resource stocks.

Bohm Squad's picture

It's helpful to price gold relative to other commodities it can buy.  For example, how many barrels of oil will an ounce buy, etc...

Convolved Man's picture

Oh spirit of the Ouija, help me divine the mystery of gold price movement.


DoChenRollingBearing's picture

If India and China can get oil for a much cheaper price if they pay in gold, then we're off to the races.  FOFOA numbers...

dust to dust's picture

 We all should do what some of the CBs are doing. Buy physical. Dumping fiat and buying physical makes sense to me. Been buying since 2002 and well positioned for the impending SHTF. Go Eric Sprott. What are the CBs dumping to buy GOLD? Curious?

Quisat_Sadarak's picture

We all should do what some of the CBs are doing. Buy physical. Dumping fiat and buying physical makes sense to me. Been buying since 2002 and well positioned for the impending SHTF. Go Eric Sprott. What are the CBs dumping to buy GOLD? Curious?

CBs.... that is the acronym for Cunt Bitchez right?

RoadKill's picture

Poor poor child. Gold out performed from 2000 to 2008 due to real inflation running 10% a year. Moderate deflation in 2009 crushed gold. Then reflation spiked it. We are in a deflationary period through mid-2013 when the pain becomes so great that we get a massive print. Spain and Greece arent enough to cause Germany to print. US falls into recession in 2013 due to budget cliff. US starts printing so Germany has to let France print both to save their banks from PIIGS blowup and to save exporters from spike in new Core Euro.

Buy gold when its below the SPX say SPX < 1,000 and gold at 900. You still might loose $ before you make it, but at least risk / reward ratio will ne -20%/+100% vs today -50%/+50%.

Bizaro World's picture

Never been good at timing, especially in never seen in modern time worldwide financial crisis. Think I will continue buying PM now, just to be on safe side, plus, need to restock all that was lost in the unfortunate boating accident.

jimmyjames's picture

Poor poor child. Gold out performed from 2000 to 2008 due to real inflation running 10% a year. Moderate deflation in 2009 crushed gold.


The bond market says you're wrong-

Gold says you're wrong-


MeelionDollerBogus's picture

poor child, gold at 900 is never to be seen in history again. You'll be waiting a long long time.

savagegoose's picture

buyouts of failed banks usually cost $1, and you get nothing but their name, and a spam list of account holders.

bailouts cost billions, and you get all the liabilities!


WTF are we doing bailing anything out/>

disabledvet's picture

To me it's patently obvious why not just gold but the entire commodity complex save corn has gotten slammed. The oddity of course is that it's for the same reason Eric Sprott is "all in on nickels." Namely "where's the pricing power Eric if your banking system collapses?" The answer of course is "you don't have any." Apparently JP is short German Bunds. OOOOPS! I hear they have some pretty okay mining equipment in Germany. Yahhh? "Spreichen zee crawler"? With their interest rates "at or near zero" as well...shall we call it "lebensraum American style"? the problem with Germany of course is that it doesn't have the rail network that the USA built for moving massive amounts of commodities (let alone the even more impressive Great Lakes Shipping as well.) Obviously a United States of Germany can build out such a thing as they already have a pretty amazing river logistics system. We'll see. Have i even brought up Latin America yet? Argentina alone has enough copper to build 50 Shanghai's.

slewie the pi-rat's picture

cover yer ass

like eric!

BalanceOrBust's picture

We are very close to the end game now.  Go back and look at what gold and silver did on September 17-18 2008.  They both rocked as the 2008 crisis was finally hitting the MSM.  


China has clearly been accumulating gold, possibly by taking it as settlement collateral.  This would not appear on the COMEX.  They are accumulating the world's gold without sending out strong buy signals.  

Brilliant.  Don't worry about China.  They are taking care of themselves.

RobotTrader's picture

Central banks are dumping commodities and gold and panic buying US Paper.


That is what the charts say.

Lionhead's picture

"That is what the charts say."  Except you're not interpreting them correctly. Blind trading from the rear view mirror is hazardous to your wealth.