As fears of a turbulent Greek exit have spread, banks and investors are fleeing southern Europe. Greek bank deposits have fallen by over a third since the crisis started and overall capital flight may have reached 10% of GDP in Italy and Spain, reckon Citigroup analysts.
Meanwhile, lenders and borrowers are battening down the hatches while uncertainty is so high. European banks have also had to increase their capital ratios to guard against another crisis. The upshot is that across the eurozone “credit is crunchier now than it was at the height of the banking crisis in 2008”, says The Economist, with southern Europe suffering the most.
In Portugal, loans to non-financial firms fell by 5% year-on-year in the first quarter. In Spain, the number of companies filing for bankruptcy jumped by a fifth year-on-year in the first quarter. In Italy, the manufacturing province of Varese saw 40% of companies hit by lower borrowing ceilings between January and March, according to the local bosses’ association.
Banks rejected 45% of new funding requests. Firms that do manage to get loans extended have to pay higher interest rates because fears over government solvency tend to drive up borrowing rates for banks in the wholesale market.
So, “much economic activity is being strangled”, says The Economist. A deepening downturn is making it all the more difficult for the indebted states to get their debt-to-GDP ratios under control, and thus worsening the overall crisis.