Must-See-Video: Wall Street Journal Produces Short New Documentary on the Eurozone Crisis

If you’re looking to educate yourself about the Eurozone crisis, or want to bring clients up-to-speed on the situation, the Wall Street Journal has just released a fantastic new 23-minute documentary on the history and impact of the ongoing sovereign debt crisis across the Atlantic. With cogent commentary from bureau chiefs on the scene in Europe, the short video puts the crisis into perspective and gets to the key issues fueling the fiscal calamity abroad. (Video after clicking More)

What I found most interesting watching the video is hearing reporters articulate so clearly the underlying dilemmas for Europeans. It’s frankly hard to see any kind of palatable solution. Are they going to bite the bullet and absorb the sovereign debt of other EU members? This is undoubtedly what the bond market would prefer, as the rescue fund and other short-term fixes haven’t solved the problem. Will Angela Merkel be inclined to put Germany’s healthy fiscal house on the line for their EU partners? Will EU members be drawn closer together politically and be willing to unite their fiscal positions? Or will the EU unravel? And what does the current uncertainty mean for economic growth in the European region, Asia and North America?

The Wall Street Journal ran a great article last fall about the impact of the Eurozone crisis on the U.S. Again, it provides great background for a discussion with your clients on the meaning of Europe’s fiscal and monetary woes.

Via the Economist Online blog:

A European sovereign debt crisis could at least affect the US economy in the following two respects.

 

First, the devaluation of the Euro triggered by the debt crisis will make American exports more expensive. [Last year] the Euro depreciated against the US dollar by nearly 15% (from 1.44 to 1.23). This will hurt the US’ exports. During the last couple of years, government spending and exports have been the only two growth engines of the American economy. With tepid consumer demand and very weak labor market, consumer spending recovery is less likely to be quick and robust. The recovery now requires a very strong corporate spending to fill the holes left by the American consumers. One way to spur corporate spending is to sell overseas. Since Europe is the largest export market for the US, a sharp rising dollar is going to kill one of the two recovery engines of the US economy.

 

But the bigger worry remains in the banking sector. The financial markets across the Atlantic are highly integrated with each other. If the Greek debt crisis spills over into other bigger economies such as Spain and Italy, it will shake the European core: Germany and France, to which the US banking sector has very exposure. The following article from WSJ offers an in-depth analysis of what a potential debt contagion in Europe could impact on the US big banks.

 

[…]The biggest threat is that the European rescue operation proves insufficient and problems spread from smaller euro-zone countries to bigger economies like France or Germany. That may threaten the viability of the euro, potentially paralyzing credit markets globally, just as happened following the collapse of Lehman Brothers.

 

If so, this could spell big trouble for five of the biggest U.S. banks—J.P. Morgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. Exposures to France and Germany, along with second-tier euro countries, is equal to about 81% of the banks’ combined Tier 1 common capital, a buffer to absorb losses, according to first-quarter and year-end securities filings.

[…]

 

Which countries should investors in U.S. banks worry about? Take Ireland, Spain and Italy. Exposures of the big-five to these three are equal to about 25% of the banks’ combined Tier 1 common capital. In particular, U.S. banks have to worry about banks in these countries being hit. Exposure to banks in Spain and Ireland, for example, exceeds risks to government or private entities.

 

An even bigger risk is if any European crisis blows back on the bulwarks of the euro: France and Germany. It isn’t impossible for that to happen. French and German banks have Greek exposure of more than €110 billion ($138 billion). Analysts have predicted that any restructuring of Greek debt could force France and Germany to recapitalize some of their own banks.

 

The big U.S. banks had exposures to the debt of governments, banks and other entities within those two countries equal to about 61% of their combined Tier 1 common capital. Exposure of the big-five banks to French and German counterparts totals about $100 billion. And while German government bonds likely would be a haven, the U.S. banks’ exposure to German banks is greater than their government exposure.

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