Europe’s debt crisis poses a serious threat to the creditworthiness of U.S. banks if it spreads beyond the five most-troubled nations, Fitch Ratings said.
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“Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the New York-based rating company said yesterday in a statement. Though U.S. banks have “manageable” exposure to stressed European markets, “further contagion poses a serious risk,” Fitch said.
U.S. banks have significantly more exposure to Europe’s larger countries than they do to the stressed nations of Greece, Ireland, Italy, Portugal, and Spain, known as the GIIPS.
The six biggest U.S. banks — JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), Goldman Sachs, and Morgan Stanley (NYSE:MS) — had $50 billion in risk tied to the GIIPS as of September 30, Fitch said.
Five of the banks, excluding Wells Fargo, had $188 billion of risk tied up in France on September 30, of which $114 billion of risk was attached to French banks. Risk to Britain and its banks was $225 billion and $51 billion, respectively.
Europe’s debt crisis has already toppled four elected governments — most recently those of Greece and Italy — and France could be next. The premium France pays over Germany to borrow for 10 years climbed 200 basis points today. French yields are now at 3.7%, compared to 2.2% for U.K. gilts and 2% for U.S. Treasuries.
Shares of French banks, including BNP Paribas and Societe Generale, dropped today amid concern that they’ll need more capital if they are going to weather the storm. And while U.S. banks have hedged some of their risk with credit-default swaps, those may not prove effective if voluntary debt forgiveness — like the Greek debt writedowns — becomes “more prevalent,” said Fitch. The top five U.S. banks had $22 billion in hedges tied to stressed markets, according to the Fitch report.
Disclosure practices make it difficult to accurately gauge U.S. banks’ risk. Banks like Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains, giving only net numbers and excluding some derivatives altogether.
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Guarantees provided by U.S. banks on government, bank, and corporate debt in GIIPS rose by $80.7 billion to $518 billion during the first half of 2011.