Fri, Jun 24, 2011 - Page 10 News List

Trichet warns debt crisis threatens to spread to banks


European Central Bank President Jean-Claude Trichet said risk signals for financial stability in the euro area were flashing “red” as the debt crisis threatened to infect banks.

“On a personal basis I would say ‘yes, it is red,’” Trichet said late on Wednesday in Frankfurt after a meeting of the European Systemic Risk Board (ESRB), referring to the group’s planned “dashboard” to monitor risks. “The message of the board is that” the link between debt problems and banks “is the most serious threat to financial stability in the European Union.”

Trichet, who chairs the ESRB, made the remarks as European leaders meet in Brussels to discuss how to stave off a Greek default, while preparing a second bailout. The EU is trying to avoid a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings and resulted in European governments setting aside more than US$5 trillion to support banks.

The top US prime money-market funds have about half their assets in securities issued by European banks, Fitch Ratings said in a report on Tuesday. The Bank for International Settlements estimated European lenders held US$136.2 billion in loans to Greece at the end of last year and almost US$2 trillion in Portugal, Ireland, Spain and Italy. Greece, Ireland and Portugal all received external support.

BNP Paribas SA, France’s biggest bank, and rivals Societe Generale SA and Credit Agricole SA may have their credit ratings cut by Moody’s Investors Service because of their Greek investments, the ratings company said on June 15. German banks could also be at risk from contagion, Fitch said last month.

“The most serious threat to financial stability in the EU stems from the interplay between the vulnerabilities of public finances in certain EU member states and the banking system,” Trichet said.

There are “potential contagion effects across the union and beyond,” he said.

Part of a wider regulatory overhaul, the 65-member board aims to identify and warn of brewing risks in the financial system. Trichet and Bank of England Governor Mervyn King, vice chairman of the board, highlighted risks in areas, including asset-price imbalances and exchange-traded funds.

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