The diabolical loop between the solvency of the banking system and the sovereign fiscal position is now apparent. In Greece it is the insolvency of the government that has sunk the banks, whereas in Spain the banks are sinking the government. What is common in both countries is that when savers see the banks and the sovereign propping each other up, they run away. Unless the banks in both Greece and Spain are soon recapitalised, the ongoing gradual deposit flight might turn quickly into a classic run with incalculable consequences.
Daniel Gros is Director of the Centre for European Policy Studies. Dirk Schoenmaker is Dean of the Duisenberg School of Finance and Professor of Finance, Banking and Insurance at the VU University Amsterdam.
