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People walk past the Greek parliament in Athens, Greece, March 4, 2015 (AP photo by Petros Giannakouris).

Failed Greek Debt Deal Would Bring More Capital Flight, Bank Runs

Friday, March 6, 2015

For all the frustration and anger surrounding the recent negotiations between Greece and its international creditors, the parties reached a temporary, four-month accommodation that provides a clear sign that both sides still want a durable agreement. They all have good reason to do so, too. Not only does each nation have narrow interests that favor an intact eurozone, but, despite more sanguine accounts of the situation, they all realize how failure risks a destructive financial contagion.

That is because the primary risks across the eurozone have shifted from the borrowing costs on sovereign debt to the danger of capital flight and bank runs. The mechanisms put in place after the 2008-2009 financial crisis were designed mainly in reaction to the first, which they have mitigated, but the second is still a potent threat in the event of a failure of a debt deal for Greece. ...

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