A $4.8 billion bond auction by the Spanish Government resulted in yields on their 10-year notes reaching an average of 6.975 percent while French 10-year notes were trading with yields over 2 percent higher than German Bunts, both the highest they’ve been since the advent of the Euro. As concerns about the European debt crisis spreading increase, Fitch Ratings revealed that American banks have significant exposures to European sovereign debt.
Increasing Yields Around Europe
Across the Euro Zone, the cost of borrowing money is increasing, showing that the crisis has the potential to spread out of the five most affected countries elsewhere. French 10-year bonds were trading 200 basis points above the German equivalents, a Euro-era high, while Spanish debt was trading at 485 basis points higher than German. On the whole, the concerns that debt alarm in Italy and Spain could spread to France spooked investors and hurt financial stocks across the continent. The increasing yields on debt coming from France, the second largest economy in the Euro zone, were of particular concern.
The European Central Bank (ECB) continued its aggressive efforts to reign in bond yields, buying up Spanish, Italian, and French bonds and helping to drive yields on Italian bonds back below 7 percent. The ECB has purchased over 187 billion euros in bonds since beginning its buying program last year. However, the precise role of the ECB in the crisis is still in doubt as political leaders continue to squabble over what form a solution to the crisis should take. German Chancelor Angela Merkel continues to oppose using the ECB to stop the crisis despite French calls for action, stating “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.”
American Banks Exposed to European Debt, Says Fitch
Unfortunately, serious concern about the European debt crisis spreading to the United States financial system could be very real. Fitch Ratings released a statement revealing that the six biggest American banks, J.P. Morgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS), and Morgan Stanley (MS), are carrying significant amounts of exposure to European paper. While Fitch characterized the amount of so-called GIIPS debt (Greece, Italy, Ireland, Portugal, and Spain) as being “manageable,” they also stated that “further contagion poses a serious risk.” Namely, if the issues in Italy and other stressed countries lead to a default in France or elsewhere in the Euro Zone, the problem could be catastrophic.
Each of the US Banks have holdings in the debt of distressed European nations, with Bank of America holding $13 billion, Citigroup $16.3 billion, JPMorgan Chase $15.1 billion,Wells Fargo $3.1 billion, Goldman Sachs $2.5 billion and Morgan Stanley $3.4 billion. However, this is dwarfed by the $188 billion in exposure to French debt, $114 billion of which is from French banks, that the five major players other than Wells Fargo are holding and the $225 billion in British debt, $51 billion of which is from British banks. The French debt alone represents approximately 25 percent of those five banks’ Tier 1 capital.
The news, released Wednesday afternoon, sent stocks tumbling across the sector and losses continued into Wednesday. Over the last two days, Wells Fargo has dropped just over 3 percent, Bank of America over 4.5 percent, Goldman Sachs over 6.75 percent, Citigroup nearly 7 percent, JP Morgan nearly 6.5 percent, and Morgan Stanley plummeting over 11.5 percent.
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