Trichet Says Risk Signals Are Flashing Red as Debt Crisis Threatens Banks

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

“On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, 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.” (…)

The top U.S. prime money-market funds have about half their assets in securities issued by European banks, Fitch Ratings said in a report on June 21. The Bank for International Settlements estimated European lenders held $136.2 billion in loans to Greece at the end of 2010 and almost $2 trillion in Portugal, Ireland, Spain and Italy. Greece, Ireland and Portugal all received external support.

BNP Paribas (BNP) SA, France’s biggest bank, and rivals Societe Generale (GLE) SA andCredit Agricole SA (ACA) 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.” (…)

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