The Daily Update - Tin Helmets, Italian Debt

For a long time we have had a major concern for the banks in Italy and therefore have no exposure to banks in general, fearful of the contagion that could happen at any time given the swings in market sentiment regarding Italian debt and politics. This we feel is a huge risk to the European Union.

Yesterday there was an interesting report that looked into Italian debt; with public borrowing reported to be 1.5trln euros concentrated on the balance sheets of Italian banks and a further EUR425bn in other major European banks. This is according to analysis by Bloomberg looking at European Banking Authority data at the end of June last year. French banks had the largest exposure to Italy, with the concentration being with BNP Paribas and Credit Agricole, together with EUR240.4bn of the total French exposure of EUR285.5bn. They are followed by German banks at 58.7bn euros, with Deutsche Bank and Commerzbank exposed to the tune of EUR42bn. Next is DEXIA of Belgium at EUR23.1bn and good old Barclays at EUR17.4bn, so exposure is widely spread.

Now add the current situation of an Italian recession and the need for the Italian government to issue around 400bln euros of debt this year, which would reportedly exhaust the European Stability Mechanisms bailout funds at 410bln euros in just one year, and you can see a dicey situation in the making.

Yes, Italy has a 4 star NFA score at the moment as the household wealth is high, but it appears this is held in property and banks in Lugano, not in Italian banks. Therefore, Italy needs the flow of foreign investment holdings, which is not a good situation to be in.

We have already seen seven Italian bank bailouts in the last three years, tin helmets on if they look again towards President Draghi to throw more money their way as his time is just about up at the ECB and of course the ‘backstop bid’ of Angela Merkel is also waining in power and support.

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