US banks will be hit hard if European politicians can't contain the sovereign debt crisis and that will trigger a meltdown on Wall Street. Direct American loans to Greece are limited but as The Wall Street Journal reports, US banks have loaned hundreds of billions of dollars to European banks. The total loan exposure is a whopping $640 billion. The problem is what happens if the European banks default on part of the debt and the European governments can't bail them to repay the loans. That could tip the US back into recession.
Wells Fargo global economist Jay Bryson says Europe is the wild card. If Greece defaults on its debt, he says, the ripples would spread to France, Italy, Spain and Germany and then to the U.S. "I can see a worst-case scenario if Greece defaults before the backstops are in place," Bryson says.
US banks like Morgan Stanley and Goldman Sachs are particularly vulnerable to the crisis in Europe because they rely on short-term borrowing from other banks. They don't have a big deposit base and that creates the problem. And that's where the problem lies.
Economics 101 tells us that when you are backed by short term money, you have nowhere to turn when the money evaporates. Which means big banks like Goldman Sachs and Morgan Stanley will be hit hard if the European debt crisis runs out of control. And that will also put the US back into recession.
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