As we watch the growing deterioration of the Greek and Spanish banking systems, I thought it might be interesting to take a closer look at the major U.S. banks’ overseas positions and exposures.
Citigroup has the largest net exposure to non-U.S. sovereign governments, with a little more than €14 billion ($17.5 billion) on their balance sheet. JPMorgan Chase comes in second, with about €8 billion ($10 billion), while Morgan Stanley is third with €5 billion ($6.2 billion), and Goldman Sachs holding the smallest position of the four big banks with €4 billion ($5 billion) in non-U.S. sovereign debt. Remember how Wall Street reacted when JPMorgan lost $2 billon in derivative exposure a couple of weeks ago? Now, imagine a $39 billion loss. As Senator Everett Dirksen famously declared, “A billion here, a billion there, pretty soon it adds up to real money.”
This is an important data point because the U.S. banks are completely exposed to the growing European banking disaster. Europe’s entire banking sector has the potential to collapse completely if the contagion catches and runs completely amok. With the current run on Greek and Spanish banks, the possibility is slowly becoming a probability. Without an EU-wide deposit guarantee, depositors will withdraw all of their funds and move them to their mattresses.
In addition, the bigger of the PIIGS, Spain and Italy, have their debt spread out across Europe, putting them in the unenviable position of causing systemic ignition to just such a contagion. As one example, French banks (Credit Agricole and Societe Generale) hold a substantial portion of their credit portfolio in Italian sovereign debt. Which we know is worthless.
Europe as a whole is in deep trouble as this latest iteration of the never-ending sovereign debt crisis could finally result in at least a partial breakup of the EU. The actual likelihood is that Greece, then Spain, followed by Portugal, Italy and Ireland will drop out of the EU.
If that happens, Germany’s most rational choice would be to withdraw as well. After all, why should they continue their exposure to more poorly managed countries who will only default on what remains of their sovereign debt? France, Sweden, Belgium, the Netherlands and the U.K. would be quick to follow in Germany’s footsteps, leaving behind, a handful of countries like Cyprus, Estonia, and Latvia to sort out the remaining arguments for remaining in the Union and supporting a single currency.
It doesn’t take much of a mental stretch to imagine what would happen next.