--IMF warns that euro-zone policy failures could create a global credit crunch
--IMF also says a large shock from the euro zone could be magnified by the weak U.S. housing market
--Credit-default swaps market could be major channel of financial troubles to the U.S. -IIF
(Adds IMF and financial industry comment throughout, starting in fourth paragraph.)
By Ian Talley
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The U.S. economy is susceptible to a range of shocks from the euro-zone crisis, including attacks on the financial sector, the International Monetary Fund warned Tuesday in its Global Financial Stability Report.
While the U.S. Treasury Department has outlined trade exposure as a major risk, it has downplayed the banking sector's vulnerability to the euro zone's problems.
But, the IMF said, the "potential spillovers could include direct exposures of U.S. banks to euro-area banks, or the sale of U.S. assets by European banks."
Jose Vinals, head of the IMF's Monetary and Capital Markets Department, said global financial stability is in a "danger zone."
"A misstep or failure to address underlying tensions could precipitate a global crisis with great economic and social consequences," he said.
For an example of U.S. exposure, the IMF pointed to commercial-backed mortgage security and asset-backed security markets, which have been under pressure in recent months, weighed down by the volume of European asset sales.
"A large shock from the euro area could be magnified by existing weaknesses, notably in the still-fragile U.S. housing market," Vinals warned.
Many European banks are raising capital levels by thinning their portfolios. The banks need to bulk up to meet new financial regulations and protect against a sovereign-debt meltdown. The IMF is concerned that deleveraging, combined by losses from further sovereign-debt woes, could cause a credit crunch in Europe that would reverberate around the globe, pulling trade and investment out of emerging and developing economies, and squeezing the U.S.
The fund said a good indicator of the type of pressure the U.S. banking system could face from funding strains in Europe is the persistent widening of interbank spreads in the dollar market, which has paralleled the widening euro interbank spreads.
Phil Suttle, the Institute of International Finance's chief economist, said spillovers into the U.S. of a euro-area shock would be "many and varied." The group represents more than 400 of the world's largest financial firms.
Although U.S. banks have cut their exposures to the region, "exposures through the credit-default swap market are significant," he said.