Italy too big to fail?
Historical Archive
This article is preserved as part of the historical record of this blog. It reflects the author's views at the time of publication. The content has not been substantively altered, although the HTML, accessibility and formatting have been updated to meet modern web standards.
Flicking through the media coverage of the Italian financial crisis, the first thing I notice is the biased reporting of the facts. These nations have been overspending for years and building up huge debts. The overspending is caused by politicians keen to win votes with government services and benefit payments. Yet the language used by the media places the blame squarely on the "markets", the ultimate denial of culpability because the markets are made up of countless entities, largely the major financial institutions.
"The European Central Bank, the only effective bulwark against market attacks, intervened to buy Italian bonds..." — Reuters India.
There were increasing calls for the European Central Bank to follow the example of the US Federal Reserve by creating money electronically. As discussed previously, I argued this would amount to inflation, which acts as a hidden tax on savings and capital.
"The only thing that would be a real game changer..." — Nick Kounis, ABN Amro.
The already fragile banking sector also faced enormous losses if Italy defaulted or was forced into substantial debt write-downs. Contemporary reports highlighted the exposure of Goldman Sachs, Barclays, RBS, HSBC, Lloyds, BNP Paribas and Crédit Agricole to Italian sovereign and private debt.
I argued that rising bond yields reflected banks reducing their own exposure while simultaneously advocating policies that would inflate away losses through monetary expansion. Such inflation would reduce the purchasing power of wages, pensions, benefits and savings, although holders of gold might be protected.
Only weeks earlier Belgium's largest bank, Dexia, had collapsed. It appeared increasingly likely that further institutions could lose access to inter-bank lending as confidence deteriorated.
Ultimately, I concluded that responsibility did not lie solely with "the markets". Overspending governments, imprudent banks and governments' unwillingness to allow failed banks to collapse all shared responsibility. While institutions created the crisis, individual citizens would ultimately bear its cost.
Historical Archive Update
This page was updated on 27 July 2026. The content has been preserved as originally published. This update was undertaken solely to modernise the HTML markup, improve accessibility, correct obvious spelling mistakes and grammatical slips, update obsolete links where appropriate, and bring the page into line with current web standards.
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