Fitch warning on US bank contagion sends stocks lower but this is not the full story

Credit ratings agency Fitch left Wall Street down sharply last night after publishing a report pointing out that US banks will not avoid the contagion from the European banking system.

On the same day the Bank of England warned that a credit squeeze was already evident due to the eurozone crisis and statistics on trade from Singapore showed a big decline in Asian trade flows last month.

If this sounds to you like late 2008 all over again then you are right. Banking crises have a very strong impact on the real economy through the impact of tightening credit on trade and investment.

No place to hide

This is in addition to the direct banking contagion identified by Fitch and discussed on this webiste many, many times before. What Fitch flagged up in particular is the uselessness of bank loan insurance or credit default swaps as a national insolvency like Greece will not trigger a payout. That leaves banks without insurance for their bad debts.

Those investors dumping their euro assets and heading into the dollar are also in for a rude awakening. The idea that the large globalized US multinationals are somehow immune from what is going on in the rest of the global economy is clearly wrong. Their profits will likely tumble by more and not less than US domestic companies.

Just because the eurozone financial crisis is happening in slow motion does not make it any less significant. Quite the contrary it makes it even more deadly and difficult to reverse.

The dominos are beginning to fall, actually several at the same time. The new Greek government is unable to agree measures to get its next payout from the eurozone and is about to go bust. Italian and Spanish bond yields are flashing red. French debt costs are soaring in comparison to German and UK yields.

Greek default

We do seem to be back to square one with a Greek default the obvious trigger for a major financial collapse. Fitch is a bit late in waking up to this scenario and what is means for Wall Street.

As ArabianMoney has noted on many occasions it was the collapse of the Austrian bank Credit Anstalt in 1931 that brought about the mass failures of US banks that resulted in the Great Depression. That happened when the US economy was in much stronger financial shape than it is today.

Over-borrowed, over-stretched and supported only by the insipient optimism of its own sales personality, Wall Street faces an awful day of reckoning.