The German government can now borrow money for two years at 0.00%.  German T-bill rates are negative.  Investors are paying the German government to protect their short-term money.  Should we be surprised?  The Intrade odds of a country announcing its intention to drop the euro before the end of 2012 now stands at 39.9%.  If investors fear that the breakup of the common currency could be in the offing, then it makes perfect sense to hold investments in countries that, in the event of a breakup, would issue stronger national currencies.  It doesn’t take an advanced degree in finance to figure that newly-issued deutschmarks would be worth more than newly-issued drachma.

Even if you believe, as I do, that European policymakers will take the necessary steps to maintain the euro as their common currency, you can’t blame Greek, or for that matter, Spanish or Italian depositors who are looking to move their money outside their own borders.  The bank jogs are in motion and as Sir Mervyn King has told us, “It’s irrational to start a bank run, (it is) not irrational to join one.”  The only way to put an end to the capital flight and the series of slow-motion bank runs is for European policymakers to provide an ironclad commitment to the euro.

Since the beginning of the crisis, we have advocated for jointly-issued bonds and Eurozone-wide bank deposit insurance to prevent capital flight and ensure the existence of the common currency.  Whether the politics allows the Europeans to get to that point remains unclear even after almost three years of crisis.  While the Germans enjoy their low borrowing costs and proceed with a lack of urgency, the periphery continues to teeter.  Global investors are less patient.  The Germans will need to respond with force.  The capital flight to German bunds suggests the day of reckoning will be sooner rather than later.

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