About Categories: Political Economy
As financial markets increasingly turn to Italy, we should remember that Italy is the 3rd largest economy in the euro zone and it has deep connections throughout the euro area. This morning’s Handelsblatt says “if the country is in serious difficulties, the German banks have a problem.” And that is because Italy is among the largest debtors in the euro area of German financial institutions, with an estimated $116 billion of debt outstanding financed by German institutions.
Handelsblatt figures show that there are only four countries where German banks have greater commitments: France (€145.6 billion), Spain (125.2 billion), Luxembourg (120.9 billion), and the Netherlands (117.7 billion). By comparison, German banks only have loans and credit of about €17 billion to Greece.
Die Welt, another German newspaper, reported yesterday that Italy has become the main concern for the euro zone as its debt sells off. Contagion has clearly reached the core. The ECB suggests doubling the EFSF and IMF facilities to deal with this. However, I should add that Felix Zulauf warned in May in Handelsblatt that he had turned bearish and expected Italy to be the next crisis country in euro land. He also mentioned a slow motion run on Italian bank deposits as a worrying sign. Ed Hugh also wrote a good piece on Italy’s problems last week. So the problems in Italy have been flagged.
The problem is if “markets become skittish about Spain or Italy, which cannot be bailed out. So EU leaders will cut Greece loose” and indeed, there is talk about doing just that – allowing Greece to default. I will be discussing the European situation and America’s debt ceiling crisis on BNN at 1230ET. What I will say is that, with Italy, a core euro zone country becoming infected by contagion, I think the policy of extend and pretend may have reached the end of the line. That is why euro leaders are meeting. They recognize a new approach is necessary or the euro zone will come apart.
Source: Italien schuldet deutschen Banken 116 Milliarden Euro – Handelsblatt
About Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
7 Comments
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john haskell
it’s ironic that Italy’s hitting the wall seems to have been brought about (at least it is coincident with) the first mention of letting Greek creditors take a haircut. “Italy is failing therefore we need to let Greece fall into uncontrolled default” seems to have it backwards.
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I think that’s the right approach actually. It’s not ‘an uncontrolled default’ that they should be aiming for but a default, yes. Greece is insolvent. The EU should have gone for a hard restructuring as soon as possible. That way they could credibly say the Greeks were different and that they would support the others.
“To my mind, this all speaks to the overriding need for policy makers to ascertain who is illiquid and who is insolvent and to as demonstrably as possible subject the insolvent and the solvent to the most differential treatment one can muster. At the end of the day, what people want to know is who is insolvent and who isn’t. Once they know, they can fight over who takes the losses. And those creditors that cannot take the losses will have to be recapitalised or resolved. Everyone else gets to live another day.”
http://www.creditwritedowns.com/2011/06/greece-ireland-bondholders.html
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David Lazarus
The problem is that they did the stress tests on the banks, and they were clearly wrong. They do not have the time to do them properly. I think that many of Europe big banks are practically insolvent. Much time and money has been wasted on hiding this fact. Greece will have a big impact on France, which will indirectly hit Germany. Add in Irelands debts much of that will impact Germany. If Greece defaults, then Ireland could face renewed pressure and eventual default. Same for Portugal. Spain and Italy being too big to save may not even be a problem as there is already tightening in the interbank markets and slow runs on banks in Ireland, Greece and Italy. So the credit crunch will return and will be much harsher this time as many governments will be overstretched or bankrupt.
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gaius marius
ed, has anyone taken the measure — or is it even possible to? — of the ramifications of a credit event in sovereign debt CDS? this trouble with this crisis is that every burning fuse you snuff seems to light another.
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David Lazarus
It must be huge because a greek default will hit European banks directly, who will probably make claims on US banks who wrote CDS cover. The problems start when a US bank collapses under such losses or a European bank does not have enough coverage and so collapses from direct losses. Since anyone could take out CDS insurance the chances are that the losses might be much larger than a total loss from all greek debt.
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[...] As I said yesterday: [...]
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[...] 6%. And since Italy is a core member of the euro zone and the zone’s third largest economy with deep connections to Germany, this has finally made the sovereign debt crisis a systemic [...]
