Whiteboard: Counterparty risk(Euro's counterparty: US & Japan banks)

Marketplace ^ | 05/07/10 | Paddy Hirsch

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Whiteboard: Counterparty risk

Europe is teetering on the edge of a credit crisis, and markets all around the world are tumbling as investors worry about contagion. It's all about banks not trusting each other, as Senior Editor Paddy Hirsch explains.

From Paddy Hirsch

/snip

One big reason: We're still out of work. Next: We're still not spending. But most urgently: They're worried about Europe. And specifically, they're worried about European banks.

Thing is, European banks are teetering on the edge of a credit crisis every bit as serious as the credit crunch that preceded the collapse of Bear Stearns and Lehman Brothers. If you don't believe me, look at the headlines: "Libor Jumps most in 16 Months;""Short Term Lending Rates Rise;""Counterparty Risk Returns to Haunt Financials."

Sounds familiar, right? Especially that last part, about counterparty risk. Banks in Europe are behaving exactly the same way today as banks in the U.S. behaved after Bear Stearns collapsed and was bought by JPMorgan back in 2008. They're circling around each other, wondering if they can trust each other. Wondering if they can afford to business with each other. Here are some of the questions they're asking:

How much Greek sovereign debt does this guy hold?

How much Greek corporate debt does he hold?

For that matter, how much PIIGS debt does he hold?

What about his other corporate debt, how exposed is it to Greece or any other of the PIIGS?

And what about the euro? Is it done for?

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