WASHINGTON — Three years ago, a financial crisis triggered by bad mortgage investments spread from U.S. banks to Europe. Panicky financial markets tanked.
Now fear is running in the opposite direction. Worries about toxic government debt held by European banks have hammered U.S. stocks. And they threaten to freeze credit on both sides of the Atlantic. And traders are wondering: Could Europe’s government-debt crisis spread through the U.S. financial system? No one’s sure because no one knows how much toxic debt European banks hold — or how much risk that debt poses to U.S. banks. But investors are worried about it.
French banks, with huge amounts of Italian and Greek government debt, are especially vulnerable. Shares in Societe Generale, France’s No. 2 bank, plunged nearly 15 percent Wednesday on rumors it was teetering under the weight of debts tied to troubled euro-zone economies. On Thursday, Societe Generale’s stock recovered 3.7 percent.
Using data from European Union stress tests on 91 European banks, Fitch Ratings said direct losses of 50 percent on Greek bonds and 25 percent on Portuguese and Irish bonds wouldn’t have made any of four big French banks flunk the test.
