Flight of funds from banks showing signs of reversal

Despite the problems in the formation of the country?s new government, more than 2 billion euros have returned to the local credit system in the last two weeks, a phenomenon which began just before the June 17 general election. The recovery on the deposits front comes after a long period of strong pressure and constant outflows.

Bank officials say that expectations of a stabilization of conditions in Greece were enough to put an end to the flight of deposits from Greek banks. In the six weeks from early May to June 15, banks estimate that deposit withdrawals exceeded 12 billion euros, with 3-4 billion of that being taken out in the first two weeks of June, during the runup to the general election.

The same sources add that the inconclusive May 6 election resulted in the flight of more than 7 billion euros from the credit system last month due to uncertainty regarding the formation of a government and the course of the economy.

The credit industry now says that the big challenge for the new government is to stabilize the economy and ease worries about a eurozone exit. The economy has been under so much pressure in the last couple of years that even the prospect of some stability and the removal of the immediate risk of crumbling will rapidly lead to a significant rekindling of financial activity, top local banking officials argue.

The country?s gross domestic product contracted by 6.9 percent in 2011 and 6.2 percent in the first quarter of this year, rates not usually seen outside wartime.

Besides the notable net intakes in deposits over the last few days (that still pale in comparison with the outpouring that preceded them), there is also an increased focus on interest rates and the various alternative products banks are offering. This interest by clients is seen as the first step toward the return of more deposits.

There are many people who are keeping cash in safe deposit boxes or at home due to worries about the course of the economy and who sooner or later will return it to the credit system once the latter stabilizes again. Bank sources note that there are citizens with up to 500,000 euros in safe deposit boxes who are losing out on thousands of euros in interest. They would rather keep their cash outside the system and miss out on interest than risk a financial disaster.

Estimates by commercial banks as well as the Bank of Greece put the amount of cash kept in safe deposit boxes, under mattresses and hidden in storage rooms at some 20 billion euros, i.e. nearly half of the cash in circulation in this country.

Bankers agree that even a small lightening of the bailout agreement terms and a minor boost to growth would see the climate change spectacularly in the country and lead to the return of a considerable share of the cash kept outside the banking system. Since the end of 2008, deposits have shrunk by some 90 billion euros, part of which has been sent abroad while another part has been used to deal with the effects of the crisis.

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