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It's MORNING EDITION from NPR News. Good morning, I'm David Greene sitting in for Steve Inskeep.

RENEE MONTAGNE, host:

And I'm Renee Montagne. The crisis in Europe has been one of the underlying causes of recent wild swings in U.S. stock markets. Bank stocks, in particular, suffer badly with any sign that Europe's debt crisis might be worsening. So what are the U.S. financial sector's vulnerabilities in Europe?

We asked NPR's Yuki Noguchi to find out.

YUKI NOGUCHI: When the U.S. borrows to cover its yawning budget gap, a lot of the money that flows in comes from overseas. More than half of U.S. national debt is held in banks or central banks outside the country. This is not the case in Europe.

For various historical reasons, a large chunk of Greek debt is held by Greek banks. A lot of Irish debt is held by Irish banks.

Jacob Kirkegaard is a research fellow at the Peterson Institute. He says that structure has its consequences.

Mr. JACOB KIRKEGAARD (Research Fellow, Peterson Institute): As soon as one of the national government bond markets gets into trouble, so does the majority of banks in that country.

NOGUCHI: But the damage isn't isolated. French and German banks also hold lots of Greek bonds. U.S. banks...

Mr. KIRKEGAARD: Do not own many Greek government bonds, however, they do own a sizable chunk of Spanish and Italian bonds.

NOGUCHI: A sizeable chunk, meaning about $34 billion according to the Federal Reserve. That $34 billion represents the U.S. financial sector's direct investments in Spanish and Italian bonds. But that's actually only a small part of its overall exposure. U.S. banks are more vulnerable in indirect ways that are harder to quantify.

One of the major ties is through investments in those troubled French and German banks. U.S. banks had half a trillion dollars invested in the French and German banking systems, according to the Bank for International Settlements which tracks bank holdings.

Jan Randolph is director of sovereign risk for HIS Global Insight.

Mr. JAN RANDOLPH (Director Sovereign Risk, IHS Global Insight): Banks, by nature, do a lot of business with each other. They're a bit like mountaineers roped up, climbing a mountain. If one banks starts wobbling, the others start getting a bit frightened.

NOGUCHI: Randolph says that fear is manifest in the marketplace right now. As a result of Europe's shakiness, banks are charging more to lend to each other, which means a tightening of credit overall.

There are other ways the U.S. financial system intersects with Europe. U.S. money market funds, for example, are heavily invested in European banks a fact that worries regulators and lawmakers. In all, the big U.S. funds have roughly $1 trillion, or about half of their assets, invested in European banks.

Finally, U.S. financial institutions also trade in insurance like derivatives, called credit default swaps.

Experts say U.S. institutions may be insuring troubled European bonds, which means they would be on the hook if there's a default, but these swaps aren't centrally tracked, so no one knows how big that vulnerability might be.

In the end, IHS analyst Randolph says, quantifying the U.S.'s exposure to Europe's debt crisis is just a guesstimate.

Mr. RANDOLPH: There's a certain amount of knowledge in terms of we can quantify certain areas of exposure, but the real problem is those - the unquantifiable not known. A lot of investors and a lot of banks simply don't know the interconnections of who holds what and who's connected to who.

NOGUCHI: The Peterson Institute's Jacob Kirkegaard says all the money has parked in Europe isn't even his biggest worry. A worsening of the debt crisis in Europe has other implications for the U.S.

Mr. KIRKEGAARD: I think this would really have a significant impact on what is already very fragile economic confidence among investors.

NOGUCHI: Europe is, after all, the U.S.'s biggest trading partner. And Kirkegaard says worsening troubles in Europe mean stock market disruptions and further crackdowns on lending in the U.S.

The worry is that another shock would be enough to send the already weak U.S. economy back into recession.

Yuki Noguchi, NPR News, Washington.

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