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How Scary Can Greece Get?

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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With Greeks getting the opportunity to vote on their economic future, let the scaremongering begin. European Union leaders will utter menacing words about the euro-exiting consequences of straying from the path of fiscal righteousness. The threat of financial Armageddon will be bandied about. As is often the case, one of the most useful ways to distinguish signal from noise is to follow the money.

Greece's Fiscal Odyssey

Here's a chart suggesting the Greeks themselves knew all along that the euro crisis wasn't over. It uses official figures from the Bank of Greece to track how much money is on deposit with banks in the country. And it shows that most of the money that fled at the start of the emergency never came back:

When there's a run on a bank -- think of the perennial Christmas movie, ``It's a Wonderful Life'' -- there's a rush to get your money out before your neighbor, in case the bank shuts its doors. When there's a run on a sovereign nation, there's a rush to get money out of the country before the government either imposes capital controls that will lock the cash behind its borders or decides to confiscate some or all of it.

Between 2010 and the middle of 2012, Greek depositors withdrew 37 percent of their cash from local banks. Total cash in the domestic banking system is down to about 165 billion euros ($200 billion), leaving it 31 percent below its peak and suggesting savers still aren’t convinced their money is safe. So a key measure to watch in the coming months as the incoming Greek government renegotiates with its creditors is whether the banking system starts to bleed deposits again. 

The second market measure to watch is the gap between Greek three- and 10-year yields. That indicator proved prescient in divining that Prime Minister Antonis Samaras's gamble on whom to pick as president would fail. The fall of the government this week, triggering elections in January that seem likely to usher in the anti-austerity, debt-renegotiating Syriza party, prompted investors to drive the gap even wider:

The final barometer of Greek risk is also the simplest. Traders in the market for credit-default swaps get paid for gauging the likelihood of a borrower failing to pay its debts. They've been ratcheting up the cost for investors buying insurance against a Greek default, as this chart shows:

So far, contagion across the rest of the euro zone is absent: At an auction of 10-year bonds yesterday, Italy achieved a record-low borrowing cost of 1.89 percent, paying less than 2 percent for the first time. Even Portuguese bonds, slapped by investors Monday, rallied yesterday. There's a temptation to view this as a Greek problem, not a euro problem.

But make no mistake. If the EU plays hardball with Greece's new leaders as the country tries to renegotiate debt forgiveness, the prospect of Greek leaving the euro will throw the entire common currency project back into turmoil. Investors will vote with their portfolios; and following the money will provide the best guide to the most probable outcomes. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net