Money is leaking out of banks in southern Europe as customersscoop deposits out of Greece, Spain and Italy to move cash to lessindebted nations such as Germany.

Greece's total deposits plunged 28 percent from the peak in June2009 to 169 billion euros ($225 billion) at the end of December,according to data compiled by Bloomberg. In Spain, deposits slid 5percent in the five months through November to 934 billion euros,the least since April 2008. Italian banks held 974 billion euros inNovember, the lowest in 18 months.

Deposits in Germany have climbed by almost 10 percent since May2010, when Greece was granted its first bailout. Deposits haverisen every month except five since the end of 2009, and reached2.15 trillion euros at the end of 2011, Bloomberg data show. Thedeteriorating growth outlook in the euro region risks exacerbatingthose flows, according to Dario Perkins, an economist at LombardStreet Research in London.

“The biggest systemic risk is if people lose confidence inkeeping their euros in Spain, Portugal or Italy,” Perkins said. “Itmakes sense to put your cash into Germany just to be safe andthat's where the real systemic danger lies. That contagion isn'tpriced in, and bank deposits are the place we'd spot it.”

Investors demand a yield premium of 3.63 percentage points tolend to Italy for 10 years rather than Germany, compared with anaverage of just 1.3 points in 2010. Spanish yields, now 5.06percent after peaking at 6.78 percent on Nov. 17, are 3.18 pointshigher than Germany's.

Greek Finance Minister Evangelos Venizelos said Feb. 3 that 16billion euros of the 65 billion euros of deposit outflows since theend of 2009 have gone abroad. Venizelos said 32 percent of the 16billion euros went to British banks and less than 10 percent toaccounts in Switzerland.

The 17-nation euro economy will contract 0.3 percent this year,according to forecasts published yesterday by the EuropeanCommission. Projected contractions of 1.3 percent in Italy and 1percent in Spain undermined a November forecast of 0.5 percentgrowth.

Bank deposits typically increase in December as people cash inassets to raise money for Christmas and companies bank theirtakings. In Italy, where some contracts call for workers to getso-called thirteenth-month paychecks, deposits rallied by 3.9percent at the end of last year to 1 trillion euros. In Spain,customers banked an extra 0.9 percent, boosting the total to 942billion euros.

Financial firms in Italy have sought to divert the flows out ofdeposits by selling bonds, which typically pay higher interestrates than current accounts. Funds held in bonds increased 7.8percent to 861 billion euros in December from a year earlier,according to the ABI, the Italian Banking Association.

Long-Term Funds

“As a system, we've preferred to offer a higher yield forlonger-term funding,” said Alessandro Santoni, head of strategicplanning at Banca Monte dei Paschi di Siena SpA, Italy'sthird-biggest bank. “The Italian banking system isn't particularlyleveraged and now it's deleveraging because deposits are growingbelow the rate of inflation.”

Italian inflation rose at a 3.2 percent rate in January,according to the national statistics office in Rome.

The decline in deposits has been most marked among companies,Bloomberg data show. Since May 2010, when the first Greek bailoutwas put in place, corporate deposits have dropped 31 percent in thecountry, while individuals withdrew 24 percent of their funds.Companies also took cash away from other nations in that period,including 21 percent from Ireland, almost 8 percent from Italy and4 percent from Spain.

Competition for customer funding has intensified across theregion, prompting central banks in countries such as Portugal andSpain to penalize banks that are too aggressive in pursuit ofcustomers' money. In Spain, the regulator obliges banks that“excessively remunerate” savers to make additional contributions todeposit guarantee funds, while in Portugal the central bankpenalizes the capital ratios of lenders offering deposit ratesabove set levels.

Portugal's banks have succeeded in offsetting companywithdrawals by winning more retail business. Corporate depositspeaked at 39.5 billion euros in December 2010 and were down 13percent at 34.1 billion euros a year later, Bloomberg datashow.

Household deposits increased by about 10 percent to 132 billioneuros in the period. That's because banks have jacked up theinterest rates they offer, said Andre Rodrigues, at Caixa-Banco deInvestimento SA in Lisbon. He estimates the average rate the bankspay soared to 4 percent or more last year, up from about 1.5percent previously.

“They started to pay huge rates of interest so households havebeen putting their money on deposit,” he said. “That isn'tsustainable and I don't expect it to continue in 2012.”

Company Caution

Declines in Spain and Italy picked up speed amid contagion fromGreece in the middle of last year. Company deposits slumped 11percent in Spain from June to November, and in Italy by 6.5percent, with multinational companies keeping as little money aspossible in the most affected nations. For individuals, the declinewas less than 3 percent in Spain and about 1 percent in Italy.

Vodafone Group Plc, the world's largest mobile-phone operator,moves cash from Greece to the U.K. every evening, Chief FinancialOfficer Andy Halford said on a Feb. 9 conference call.GlaxoSmithKline Plc, the U.K.'s largest drugmaker, startedrepatriating cash held in most euro-area banks early last year,said Chief Executive Officer Andrew Witty.

Paul Richardson, finance director of WPP Plc, the world'sbiggest advertising company, said Feb. 8 that WPP removes excesseuros from its banks in Europe and changes them for dollars daily.Reckitt Benckiser Group Plc also takes cash out of its Europeanbusinesses daily, CEO Rakesh Kapoor told reporters, also on Feb.8.

Actelion Ltd., the Allschwill, Switzerland-based drug maker,said in its annual report that as of Dec. 31 it was owed 209.5million euros by public institutions in Greece, Italy, Spain andPortugal, of which 60 million euros is more than a yearoverdue.

Cash “comes back to Switzerland as soon as it can,” ChiefFinancial Officer Andrew Oakley said in an interview, declining tobe more specific. “The situation in southern Europe got a lot worsein the second half of the year.”

The combination of rising yield premiums investors demand tolend to Italy and Spain rather than Germany, plus the shifts inbank deposits between countries reflect the region's multi speedeconomy.

“Soaring bond yields and falling bank deposits highlight whatthe periphery just isn't able to do as part of the euro,” said AlexBellefleur, an economist at Brockhouse & Cooper Inc. inMontreal. “Capital flight is a huge deal and it's very difficult tostem within an open-border currency union.”

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