Greece blinks, but respite could be brief

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Mervyn King, the governor of the Bank of England, once said that it is not rational to start a bank run, but it is entirely rational to participate in one.

On Sunday -- election day in Greece -- the Bank of Greece was haunted by Mr. King's words. For about two years, Greece's banks had suffered a steady, albeit slow, outflow of deposits as customers, fearing an economic or banking collapse, stashed their cash in Germany, Britain, Canada and other countries not embroiled in full-blown crisis.

The deposit base had shrunk to €150-billion from €240-billion. In recent weeks, €500-million to €700-million were flowing out of the Greek banks every day. The Bank of Greece knows this. It gets its grim deposit tally every afternoon.

Commercial banking sources said the Bank of Greece was in something close to a panic on Sunday, when it appeared that Syriza, the anti-bailout, anti-austerity party that was going up against its philosophical opposite, the New Democracy party, were running neck and neck in the unofficial polls. Syriza's goal was to scrap the austerity programs, which they rightly blamed for plunging Greece into crippling recession. Its victory would have triggered the ire of the European Union and the International Monetary Fund, the sponsors of Greece's twin bailouts. Bailout funds would have been suspended or ended, triggering financial chaos, made worse because of an inevitable bank run.

The Bank of Greece was making plans to go nuclear. If Syriza had won, accelerating the deposit run, it would have implemented deposit-withdrawal limits, the sources said. The central bank's nightmare was TV images of long queues at banks. "One TV image of 50 people lined up outside just one bank and it would have been all over for us," said one source.

If withdrawal limits were put into place (as they were in the Argentine crisis a decade ago), the banks may have been spared imminent death or nationalization, but bank customers would have been so agitated that day-to-day business might have ground to a halt.

As it turns out, Syriza placed second and New Democracy, led by Antonis Samaras, has been given the opportunity to form a coalition government, a process that may take several days. On Monday morning, the Greek market and Greek banking shares were soaring. Bank run averted, the Bank of Greece now hopes the slow-motion bank run will get even slower.

It should not get its hopes up. The formation of a new government will not change the fact that Greece's economy remains in near free-fall, its banks exceedingly shaky. And a new coalition government may be short-lived, with Syriza having emerged as such a powerful opposition force. Political instability could easily accelerate the deposit withdrawals and Mr. King's words would once again haunt Greece's banking officials.