It’s All Connected: An Overview of the Euro Crisis

European leaders are dealing with growing debt problems that are rattling investors worldwide. Here is a visual guide to the crisis.

• It’s All
  Connected
• The Immediate
  Trouble
• The Risk
  of Contagion
• A Possible
  Scenario
• Continental
  Contagion
• Global
  Reverberations

GermanyFranceItalyGreeceIrelandJapanUnited StatesBritainSpainPortugal

Arrows show imbalances of debt exposure between borrowers in one country and banks in another; arrows point from debtors to their bank creditors. Arrow widths are proportional to the balance of money owed. For example, French borrowers owe Italian banks $50.6 billion; Italian borrowers owe French banks $416.4 billion. The difference — their imbalance — shows France's banking system more exposed to Italian debtors by about $365.8 billion.

The risk to countries’ debts and economies is indicated by color:

   

More worrisome

Greece amassed a huge debt that it has scant hope of repaying. A chaotic Greek default could hurt all European banks and pension funds that have extended Greece credit and cause a wider bank panic. A financial firewall might halt contagion by backstopping the credit of four other shaky nations — Ireland, Portugal, Spain and Italy.

If there is no firewall or if it is inadequate, it would be easy to imagine a run on banks. The euro zone’s single currency makes it easy to shift money across borders from risky economies to safer ones. That and the lack of central banks in each country -- those went away in 1999 with the arrival of the euro — make the euro zone “the ultimate contagion machine,” says Kenneth Rogoff, a Harvard economist.

Euro Zone

If no preventative measures are taken, a chain of events like this could unfold: In reaction to a Greek collapse, investors become worried about their exposure to other risks in the region. Borrowing costs rise for Ireland, Italy, Portugal and Spain, adding to their debt loads.

Italy may not be able to protect its banks if there is a loss of confidence. French banks, burdened with all manner of Italian debt, could totter. Money could flee to safer countries like Germany in a matter of hours.

Losses could extend to American banks, which have large exposures to debt in France and Italy. On top of this, American exports to the European Union — collectively the biggest American trading partner — could suffer if the crisis slows European growth and causes the euro to depreciate against the dollar. Exposure to French banks could lead to other losses beyond the Continent.

Note: The B.I.S. data used here do not include debts between non-bank entities.
Figures show amounts that bank systems, based in or controlled from one country, are exposed to debts from borrowers in other countries.

By XAQUÍN G.V., BILL MARSH, ALAN McLEAN and ARCHIE TSE; Seth W. Feaster, Nelson D. Schwartz and Tom Kuntz contributed reporting. |

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Sources: Bank for International Settlements (bank exposure data; table 9D of Preliminary International Banking Statistics Report, released Oct. 20, at www.bis.org); Simon Johnson, Massachusetts Institute of Technology; Kenneth S. Rogoff, Harvard University; International Monetary Fund (G.D.P. size and general government debt-to-G.D.P. ratios); Congressional Research Service (American bank exposure)