Ripple effects of Europe's credit crunch

A woman poses with a euro coin in front of the giant symbol of the European Union's currency, the euro, outside the headquarters of the European Central Bank in Frankfurt, Germany.

TEXT OF STORY

Kai Ryssdal: Thursday's moment of panic aside, if you step back and look at the bigger picture, there is more to what's going on than just computer-driven trading gone mad. Even before the bottom briefly fell out, traders were looking at the debt problems in Europe and what that is doing to the credit markets there.

Marketplace's Jeremy Hobson explains.


Jeremy Hobson: During yesterday's freak show in the equity markets, Fixed Income Strategist Guy Lebas was following events from his perch on the trading floor at Janney Montgomery Scott. He says it all started with banks in Europe nervously looking for cash.

Guy Lebas: In order to increase their cash holdings, they tried to sell aggressively a lot of corporate bonds. There weren't too many buyers out there at that moment, so that created a situation of massive oversupply.

And those European banks were already worried about all the government bonds on their books, not to mention a rapidly falling euro.

Lebas: And it's really the fears more than anything fundamental or concrete that's driving the concerns.

Lebas is not prepared to call this crisis "Lehman Brothers Part Deux" just yet. But he says the interconnectivity issues we heard about back then, are just as relevant in this situation.

Lebas: The issue is that U.S. banks and European banks, they borrow from each other, they enter into transactions with each other. And so there's an interconnected web, whereby if one institution were to have stresses, almost by definition every other large institution in the U.S. would as well.

Independent financial analyst Michael Prest has been watching all of this from London. He says there are concerns a credit crunch could lead Europe back into recession.

Michael Prest: The concern here must be that if this crisis gets out of hand, and the banks are forced to draw in their horns again, restrict lending and so on, the recovery will be nipped in the bud.

Not everyone felt like talking about crisis after close of business in Europe today. One bank analyst I reached said he couldn't: After a long week, he was already well into happy hour.

In New York, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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