Greece is finding out that you can't have an economy without banks, but you can't have banks without an economy, either. Or at least one where businesses aren't allowed to buy the things they need to stay in business.
Now, Greece's banks have fallen victim to a classic blunder. The most famous of which is "never start a land war in Asia," but only slightly less well-known is this: "never set up shop in a country that's been forced into mega-austerity and capital controls as a result of the currency union it's a part of." In other words, they didn't lend money to people they shouldn't have or lose money on their own bad bets. Greece's banks just made the mistake of being banks in Greece.
Part of it is the fear that Greece will get kicked out of the common currency, and everybody's euros will get turned into drachmas that aren't worth anywhere near as much. That's set off a slow-motion bank run—a bank jog, really—that picked up the pace the past few months when it looked like there might not actually be a deal. But that was a manageable problem as long as the European Central Bank did its job as a lender-of-last-resort, and loaned Greece's banks cash in return for hard-to-sell assets. The ECB stopped doing that, though, and Greece's banks had no choice but to close for a few weeks or else close for good. Not only that, but the government has had to prevent people from moving their money out of the country, what economists call capital controls, so that the run on the banks wouldn't turn into a run on Greece.
It's only a slight exaggeration to say that this has made Greece go from having not much of an economy to having not one at all. Greek companies haven't been able to pay foreign suppliers since they can't send money out of the country, so their factories have run out of supplies. Everything has come to a standstill. Greece's Purchasing Mangers Index, which measures manufacturing activity, just collapsed from a sickly 46.9 to a deathly 30.2. Anything less than 50 means that the manufacturing sector is shrinking.
That, in turn, means that Greek businesses that should have been able to pay back what they owed won't be anymore. And so the Greek banks that loaned them money—which, at the time, was a perfectly reasonable thing to do—are in line for a lot more losses. How many more? Well, enough that, as you can see below, their stocks have fallen by the maximum 30 percent almost every day since the country's markets re-opened. Add it all up, and Greece's four-biggest banks have plunged between 80 and 90 percent since last October. At this rate, it won't be long until they need the 10 to 25 billion euro bailout that Greece's creditors think it will take to recapitalize them.
It's a reminder what a high economic cost Greece has paid for not even no gain, but actually a negative one. Greece's ruling party, Syriza, thought it could win better bailout terms by playing a game of chicken where it all but threatened to leave the euro despite the fact that it had no intention of doing so. It was wrong. The problem was that, for Germany at least, this wasn't so much a threat as an opportunity—Berlin proposed, in the most condescending terms possible, that Greece take a five-year "timeout" from the common currency. (No word on whether Greece would have to turn and face the wall as well).
The result was that Syriza incurred a lot of the costs of leaving the euro, like a financial crisis, at the same time that it kept the costs of staying in the euro, like austerity. Even that understates what a disaster it's been, though, since Greece ultimately had to agree to harsher terms that have increased the costs of staying in the euro. If Cyprus's experience with capital controls is any guide, it will be years before Greece will be able to lift theirs, weighing down an already weak economy even more.
The only consolation is that Greece's banks can't fall below zero.