Tuesday, May 29, 2012

Get in Line; Fast. Bank Runs Beginning?

The old adage is,"When you see a line forming at your bank, get in it."

If you live in Spain or Greece, take a supply of food and perhaps even a tent. The line could be long.

Yesterday, Spain bailed out its third largest bank, Bankia, to the tune of $24bn. Bankia was created out of a number of insolvent regional banks in an attempt to consolidate the good and hopefully hide the bad. Another confidence trick. Well, it didn't work. Money has been pouring out of Bankia faster than you can say, 'bank run' and yesterday, the Spanish government, itself having no money, managed to stump up the cash to keep it afloat. Here's how.

The BBC reports it like this. "Rather than borrowing money on the open markets, potentially at high cost, there are reports that Madrid is considering giving Bankia government bonds. The bank would then use them as collateral for loans from the European Central Bank.

One analyst said this would amount to "an ECB bailout through the back door".

Is that laughter I hear from my readers? If it is, it would be rightly expressed. Just pretend two people were competing to borrow money from you and one offered you Spanish bonds as collateral and the other some physical gold. No contest, the gold wins. The bonds are worthless or soon will be.

Anyway, back to the bank runs in Europe. When a bank gets in trouble, people quickly hear about it and take action. Confidence quickly ebbs. Money begins a flight to safety. Banks are not well capitalised. In other words, they only hold about 5% of everyones money on their balance sheets. So when everyone lines up to get what is rightfully theirs, it isn't actually there. The bank will probably close its doors and disappear. After that, counter-parties have first dibs on the assets the bank will have left after the rush. You lose.

But the real problem with bank runs is that they are highly contagious. Once begun, even in an obviously bad bank, they can spread quickly to solvent banks. Last Monday to Wednesday, depositors withdrew 700 million euros per day from European banks. The fear is these runs will spread further in Spain and even to Italy, countries which are far too big to save with money printing.

At the moment these withdrawn deposits from Greece and Spain are making their way to safe countries like Germany and France. Gold is also nearing new highs in euros as safe-haven demand increases.

The eurocrats and governments are now at the end of the road looking deep into the abyss. All the cans they kicked down the road have disappeared into it.

Time has run out?

Gold in New Zealand dollars: $2066.04 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $37.32 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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