One of the effects of a Grexit: A major whooshing sound, as cash rushes out of Spanish and Italian banks, as nervous nationals fear a return to pre-euro currencies in their countries.
A Greek exit could lead to a 20-30% deposit outflow
We believe that unless a credible deposit insurance scheme is set up or other credible mitigation measures are taken, savers in Spain and Italy (as well as Portugal) will fear a return of their historical currencies. This could prompt them to withdraw their deposits from the local banks and try to turn them into either resilient assets or move them outside the country. This is unlikely to take place in the form of a bank run but will more likely materialise as a continuing drain over 12 to 18 months.
Absent a major intervention by the ECB, the Italian and Spanish banks will then have to (i) de-lever their balance sheet to offset the reduced deposit availability, (ii) de-lever further to a 110% loan/deposit ratio to mitigate the continued drought in the wholesale funding market and (iii) offer materially higher rates on the remaining available deposits in the market. We assume for the purposes of this analysis that the Italian and Spanish banks will not repay the LTRO early and that the ECB will prolong the LTRO from 3 years to 5 years.
All that being said, it’s not unreasonable to think that if Greece were to leave that the ECB would in fact be very proactive, opening up all kinds of new firewalls (including deposit insurance) to make sure that something like this doesn’t happen. Since a Grexit will probably be induced by the ECB (via the ECB shutting off Greek banks from funding) it won’t be caught unawares (most likely!).