The history behind the familiar concept of the European “bank holiday” dates back to 1871, when the Bank Holidays Act was passed in the United Kingdom. It established four days each year when banks would be closed. Typically those days fell on major religious holidays. By the end of the nineteenth century, bank holidays had become a familiar part of life in the UK and Commonwealth countries – they were also considered unofficial national holidays in Ireland and then the custom spread to continental Europe in the twentieth century.
The banks close their doors on those dates, and the public are either given a day off or are paid a certain amount for such days, depending on their labor contract. European countries usually schedule their “bank holidays” for the same days: Christmas Day, Easter Monday, and some other traditional days of celebration (primarily church holy days). However, as the number of active Christians is rapidly declining in Europe, often the term “bank holiday” is used without any reference to the birth of Christ. Although the banks are closed, shops, restaurants, and businesses catering to those seeking entertainment still operate at full throttle.
But in the US, the term “bank holiday” evokes different memories. Early in 1933, a new president, Franklin D. Roosevelt, moved into the White House. The economic and banking crisis was at its peak. On his first day of work, on March 4, 1933, FDR signed a decree proclaiming a four-day bank holiday. During that time, 14,207 US banks (both federal and local institutions) completely ceased their operations – no one could make deposits, loans, payments, or carry out any other banking business. The purpose of the proclamation was to stop the run on the banks and the ensuing panic. Thus a precedent was set for the use of one of the most radical means of fighting banking crises.
And so on June 29, 2015, the Greek government issued an order declaring a bank holiday until July 6. But this is not the type of bank holiday that falls on a traditional day of celebration and is associated with fun and relaxation. In Greece, these “holidays” are the result of the debt and banking crisis and are fostering an atmosphere of gloom and acute anxiety.
Negotiations with Greece’s international lenders in recent weeks have come up empty-handed, and the probability of default has increased each day. Greek banks have seen a growing exodus of deposits and the country is increasingly hemorrhaging capital. A total of two billion euros was pulled out between June 19 and 21. By the end of June Greek banks had introduced an unofficial cap of 3,000 euros on daily cash withdrawals. Over the last weekend (June 27-29), bank ATM machines were drained dry.
The European Central Bank (ECB) has somewhat curbed the panic in Greece. It has propped up Greek banks through a program to provide Emergency Liquidity Assistance (ELA) and has raised the credit ceiling several times: by 1.1 billion euros on June 17 and by another 1.8 billion euros on June 19. As a result, Greece has received a total of almost 86 billion euros of financing under this program. In Brussels and in Berlin, home to keen opponents of continued support to Greek banks, concerns have been voiced that the credit being extended is being used by Greek banks to purchase new Greek government T-bills.
According to the press, the government’s decision to proclaim a “bank holiday” was necessitated by the fact that the European Central Bank has refused to extend the program of assistance to Greek banks, which could dry up liquidity. Until July 6 there is a limit on account withdrawals: no more than 60 euros per day. But these restrictions will not apply to cardholders of foreign banks. The government has also banned international cash transfers, except for commercial transactions that are absolutely vital and previously approved.
Greek Prime Minister Alexis Tsipras has assured his citizens that the money they have deposited in banks is safe and will not be lost. In order to minimize the negative impact of the government’s decree on the tourism industry, the state has drafted a special press release emphasizing that the new regulation does not apply to foreign tourists.
It is important to understand what steps officials are planning to take during these compulsory “bank holidays” in order to ensure that the runs on Greek banks do not resume after July 6. It should be noted that in March 1933, the US government managed to implement a number of emergency measures during those few days the banks were closed, which safeguarded those institutions from bank runs even after they reopened. But we have no information about any actions the Greek monetary agencies are taking during these “holidays.” Everyone is talking about the fact that the bank holidays are timed to coincide with a referendum that is scheduled for July 5 and which is intended to ascertain Greek public opinion about the international creditors’ proposals (whether they agree or disagree).
But regardless of its outcome, the referendum itself will not stabilize the country’s banking system. If the conditions offered by the creditors are rejected, that would almost automatically lead to a Greek exit from the eurozone. And once outside the eurozone, she would once again require a national currency. For example – a new drachma. However, the Bank of Greece will not be able to instantly meet the needs of the country (both the needs of the national economy and of Greek citizens) in the new currency. No information has yet emerged about any preparations for such a transition.
But even if the public does vote to support the proposals from Greece’s international creditors, that approval will have little meaning, simply because the vote is not scheduled to take place until after June 30 – which is the deadline for Athens to make a payment of 1.6 billion euros on its IMF debt. The IMF’s managing director, Christine Lagarde, has stated that the upcoming referendum will be invalid, as it will take place after the deadline for the loan payment has expired.
Failure to make the IMF debt payment will mean that as of 6:00 pm on June 30 (EDT), Greece will be in default. And so the outcome will be the same – the country’s automatic exit from the eurozone and the inevitable introduction of a national currency.
In addition, the government’s proclamation of a bank holiday could remain in effect after July 6. Or else a different, more sweeping state document might emerge. There can be no doubt that the restrictions on pulling capital out of the country will be preserved and even toughened. Fortunately Athens has an example to follow. When a banking crisis erupted in Cyprus in March 2013, one of the measures taken to mitigate the crisis was the decision to sharply restrict the flow of capital out of the country. Those constraints were not lifted until April 2015.
Experts claim it is possible that the euros currently held by individuals and legal entities in their bank accounts could be converted into new drachmas. This immediately raises a host of questions: would this conversion be voluntary or compulsory? What rate would be used for the conversion? What means would the government use to stabilize the drachma’s exchange rate? And so on. Many rightly believe that if there is a default, the drachma will become a “falling” currency and it will be extremely difficult to sustain its exchange rate.
Even according to the most optimistic estimates, if the Bank of Greece introduces a new drachma after July 6 it will still take a few months to transition to the use of a national currency. In a best-case scenario, it would be the end of the year before the Greeks could get their hands on the new drachma. The big question is what sort of money the Greeks will use this summer and fall.