Italy too big to fail?

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 who are keen to win the votes of the electorate with 'bribes' in the form of government services and benefit payments. But the language used by the media places the blame squarely on the 'markets', this is of course the ultimate denial of culpability as the 'markets' are comprised of an inestimable number of entities, although largely of course the large financial institutions.

"The European Central Bank, the only effective bulwark against market attacks, intervened to buy Italian bonds in large amounts but remained reluctant to go further" and "With the markets' fire turned firmly on Italy". Reuters India

There have been pleas that the European Central Bank take up the activity of the Federal Reserve and turn on the printing presses which of course would simply lead to inflation, which as discussed previously is simply an insidious tax on the capital reserves of Europeans.


"The only thing that would be a real game changer would be if the ECB were to take up this idea of being a lender of last resort to governments, but printing money is against the ECB's religion," said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam.

The already bankrupt banks now stand to lose their shirt if an Italian default occurs or even if they have to take the same 50% loss that has been imposed on their holdings of Greek debt. The amount of debt hold by major banks is readily available from various sources:

Goldman Sachs Group Inc. (GS), the fifth- biggest U.S. bank by assets, had $2.32 billion of “funded” credit exposure to Italy’s government, financial institutions and companies as of Sept. 30. Bloomberg

The latest figures published by the UK’s four biggest banks show they hold a total of £42bn of Italian debt. Barclays has by far the largest overall holding at £25.7bn, of which just over £4bn is in the form of a direct exposure to the Italian government. Taxpayer-backed Royal Bank of Scotland has the second largest total exposure at £9.7bn, though just £400m of this is to the Italian government debt after the bank sold off more than £2bn of the country’s bonds over the summer. Like RBS, HSBC has also in recent months moved to cut its holding of Italian debt and currently holds about £4.3bn, of which about £1.6bn would be directly at risk in the event the country becomes unable to meet its financial obligations to its creditors. Lloyds Banking Group, which is 41pc owned by the state, has the smallest exposure of Britain’s big four high street banks, with £2.7bn of Italian holdings, just £52m of which is in the form of government bonds. Daily Telegraph

BNP Paribas SA and Credit Agricole SA (ACA), France’s largest banks by assets, are finding that their pursuit of growth in neighboring Italy in the past decade has a downside: political risk. As the world’s biggest foreign holders of Italian public and private borrowings -- with $416.4 billion of such debt at the end of June. Bloomberg

We uncover the source of the increase in the yield (the sell-off of debt by the banks) together with their preferred solution (inflationary printing of money) which happily, for them, is exactly what is required so they can stabilise their balance sheets and remain afloat when they are ever forced to write down to the true value of their toxic debts; the mortgage backed securities. Of course the purchasing power of wages, benefits, pensions and savings will be reduced at the same time, unless you are holding gold of course.

It was only two weeks ago that Belgium's largest bank, Dexia went under and it seems likely as the banks assess each other's exposure to Italian debt, one or more will be nominated to take the fall and will no longer be offered inter-bank loans.

It is not of course the 'markets' that are responsible for the problems - blame must be shared equally by the overspending governments and the banks who have made bad decisions and the refusal of governments to allow the banks to fail. The problems were created by organisations but cost will ultimately be borne by individuals.