Pew, IMF Research Shows Bank Holidays Rare In Financial Crisis

Financial crisis such as being witnessed in Greece is unusual for one important reason, new observations from the Pew Research Center show.  Culling data from the International Monetary Fund’s research database, the Pew analysis points to issues that those with money in Greece might anticipate in the future.

Banking holidays are a rare occurrence in financial crisis

The researcher observed that bank holidays, such as that in Greece, are a rare event even during crisis. In 147 banking crisis studied, in only seven cases did national governments freeze bank deposits. Separate analysis notes that this activity took place primarily after the concept of currencies not tied to gold blossomed. The seven events were: Argentina (in 1989 and again in 2001-02), Brazil (1990), Ecuador (1999), Panama (1988), Uruguay (2002), Chad (1983), Cyprus (2013).

On a statistical basis, then, Greece is not only an oddity because its banks are closed but also the duration of the bank closing, one measure of trend momentum, is unusual in Greece. “In the past, bank holidays usually lasted a week or less,” the report, written by Drew DeSilver, observed. The oddity is Cyprus, which lasted several weeks as a result of their involvement with the Eurozone. And here is an interesting corollary noted.

Both Cyprus and Greece have had longer than average bank closings during their financial crisis. While the report didn’t mention it, one reason for this might be due to involvement with the euro currency. Greece’s problem right now is liquidity. They are being suffocated by the ECB, who controls the currency valve and hopes to force a deal upon them. Greece has been resistant to the pressure, but at some point the boot applied to the neck either gets too oppressive and the sovereign nation chokes to death, or the boot is withdrawn from the neck and a more civilized approach is taken.

Exiting a currency union, a marriage of sorts, is never an easy task by design and is made more complicated by debt

But on a practical level, exiting a currency union is likely to result in longer bank holidays simply due to the core fact the currency is not flexible. Banking being driven by currency liquidity, lacking the ability to manage a currency also means lacking the ability to implement flexible monetary policy. If they were printing their own currency, for instance, they could open the banks sooner because they would have the cash to do so. In the case of Greece EU cash is limiting their ability to open. A correlary observation relates to the total number of European crises relative to other countries recently. Why is this particular region having so much trouble as of late?

Exiting the euro currency is like exiting a marriage: it is made difficult for a reason. But in this diametrically opposed relationship there is the factor of debt that makes a significant difference. One party to the relationship owes money to the other. Thus, parting is not only an emotional but also a financial issue.

While cultural norms are not often brought into financial discussions, it might also be wise to examine the culture in Germany, where debt forgiveness is almost unthinkable. This comes despite the fact that in the 1953 London Agreement, when nearly 60 percent of the debt Germany owed was forgiven. (The exact terms of the agreement are unclear, as a recent statement from Thomas Piketty indicated more than half of German’s debt was forgiven. This number surprised UN sovereign debt expert and Jubilee USA President Eric LeCompte, who previously believed 50 percent of Germany’s World War II debt was forgiven.)

This all points to a complex situation. But where the Pew research stands out is in filtering out the clutter to note significant next steps that investors and anyone with money in the Greek system might expect.

One bank related event to expect in the coming months and years from Greece’s financial crisis

Pointing to historical data, the researchers observe that even after the closed banks reopen, restrictions on critical banking functions, such as accessing deposits and transferring funds, can last for months or even years. In other words, money is trapped, often times they don’t let go – especially those bank accounts or investments held by foreigners or where an arrangement is denominated in foreign currency. Thus, watching for this eventuality might be prudent for those with Greek-tied financial relationships.

When considering the type of financial crisis, researchers use three primary buckets: currency, banking and debt crisis. Currency crisis is most common, with 153 solo instances. There were 100 banking crises and 19 solo debt crises.  Debt being a compounding issue, it might be a logical expectation to project that debt crisis in the future might revert from their statistical low point and find equilibrium with banking and currency crisis, particularly as those components are becoming ever more integrated with one another. This can be seen in 48 crisis having some overlap with another category. In other words, a debt crisis and a currency crisis can be highly correlated events, particularly if the debtor has their own currency.

Review the Pew / IMF research here.