Despite being more than 5,000 miles from Washington D.C., a default in Athens could trip up the global banking system just enough to tip the U.S. into a recession, investors and economists said.
“Due to financial trading relationships and off-balance sheet exposure to European banks, the U.S. banking system will not go unscathed,” said Michelle Meyer, a Bank of America Merrill Lynch economist, in a note to clients Friday. “If the crisis in Europe escalates, it could be the shock that pushes the U.S. economy into recession."
While this is not the base case predicted by Bank of America, the firm does still prepare its clients for this possibility by laying out how the Greece crisis could quickly become a “Lehman event.” After all, a 50 percent haircut on Greek sovereign debt would mean a very manageable $60 billion, or just two percent, of total bank foreign claims for U.S. banks, according to the report. But that’s just director exposure.
There are five major ways the U.S. is connected: trading counterparty risk and derivative ownership with heavily-exposed European banks, overall market confidence, central bank funding, money-market funds and trade flows.Page 1 of 4 | Next Page