Bank’s Collapse in Europe Points to Global Risks
http://www.nytimes.com/2011/10/23/b...l-risks.html?_r=1&nl=todaysheadlines&emc=tha2
As Europe’s debt crisis has deepened, a recurring question is how much risk it poses to the United States economy, and especially American banks.
While American financial institutions have sought to limit any damage by reducing their loans and thus lowering their direct exposure to Europe’s problems, the recent rescue of the Belgian-French bank Dexia shows that there are indirect exposures that are less known and understood — and potentially worrisome.
Dexia’s problems are not entirely caused by Europe’s debt crisis, but some issues in its case are a matter of broader debate. Among them are how much of a bailout banks should get, and the size of the losses they should take on loans that governments cannot repay.
Among Dexia’s biggest trading partners are several large United States institutions, including Morgan Stanley and Goldman Sachs, according to two people with direct knowledge of the matter. To limit damage from Dexia’s collapse, the bailout fashioned by the French and Belgian governments may make these banks and other creditors whole — that is, paid in full for potentially tens of billions of euros they are owed. This would enable Dexia’s creditors and trading partners to avoid losses they might otherwise suffer without the taxpayer rescue.
Whether this sets a precedent if Europe needs to bail out other banks will be closely watched. The debate centers on how much of a burden taxpayers should bear to support banks that made ill-advised loans or trades.
Many on Wall Street and in government argue that rescues are essential, to avoid the risk of destabilizing the financial system — with one bank’s failure to pay its obligations leading to problems at other banks. But others counter that the rescue of Dexia is reminiscent of the United States’ decision to fully protect big banks that were the trading partners of the American International Group when it collapsed, a decision that was sharply questioned and examined by Congress.
