Run on European banks now a real possibility, say experts

Bank runs and a chain reaction collapse of the euro system are now real possibilities after Moody’s overnight decision to downgrade 16 Spanish banks, according to Jason Gaywood, director at currency specialist HiFX.

Another ratings agency, Fitch, downgraded Greece even further into junk status, warning of the possibility of widespread public and private default in the country.

"This simply cannot continue indefinitely and sooner or later either the money or the will to artificially support these institutions and sovereign nations alike will run out and one gets the feeling that it is now a matter of when rather than if we will witness the break-up of the crippled euro," Gaywood said.

He believes the threat of bank runs on Spanish lenders, once added to the burden of huge property debts that look unlikely to be repaid, could push the country into an irretrievable spiral resulting in either bank collapses or mass bailouts.

"The danger now is that panic will set in as the population races to get their money out, resulting in the self-fulfilling prophecy of a run on the banks. We witnessed this situation here in the UK back in 2008 when people queued for hours to withdraw cash from the doomed Northern Rock. The difference now is that a large number of banks and nations are affected and the risk of contagion is acute," he added.

Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment, says the ECB is coming under increasing pressure to intervene.

"With rumours of bank deposit withdrawals, Spain can ill-afford another blow to confidence. Once a bank run begins it is very hard to stop without a credible deposit guarantee," he explained.

"As Greece shuffles towards the exit, all eyes are turning to the ECB. Recent experience of political dithering indicates that this is the only European institution capable of erecting a truly credible firewall."

However, Cooper believes the ECB is likely to suffer internal political divisions as the situation becomes more severe, making it harder to find the consensus necessary for the action required.

Andrey Dirgin, head of research at Forex Club, thinks a Greek exit from the eurozone could be worse than many analysts believe, and that a new round of downgrades would be likely to follow.

"The stability of the eurozone would be fundamentally undermined and we would expect the positions of the common currency to be slashed," he said.

Dirgin thinks the turmoil will also affect the UK, with markets fearing that Britain will be dragged down by problems in its biggest trading partner.