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