Credit Crunch May Affect Maximum 1.2 Trillion Euros in Debt

The global credit crunch may force banks to take back up to 1.2 trillion euros ($1.66 trillion) in debt on their balance sheets if investors are unable to refinance it, the Dutch Central Bank (DNB) said on Monday.

Dutch media reported on Saturday that DNB President Nout Wellink, who is also a European Central Bank Governing Council member, had said that the credit crisis could cost up to 1.2 trillion euros, but a DNB spokesman said that he had been misinterpreted.

"Wellink tried to explain that the amount of 1,200 billion euros is an estimate of the maximum amount of loans that in an extreme scenario could return on the banks' balance sheets if the crisis on the credit markets continued," the spokesman said.

Defaults on U.S. home loans made to borrowers with poor credit records -- the subprime market -- have created a credit squeeze internationally as the loans were repackaged and sold on as asset-backed securities to investors across the world.

Independent investment vehicles, but backed by bank guarantees, finance the securities partly with short term debt. But if they are not able to refinance their short term obligations, banks may have to put the securities on their balance sheets, the DNB spokesman said.

"Putting back the securities on the balance sheets doesn't mean these assets are also losses. In case these assets comprise of bad loans, it could result in a loss," the spokesman said. "In general, possible impairments will only affect a small part of the principle," he said.

It would take time before the exact amount of losses was known, but banks would be able to absorb these losses, the spokesman said.