ANALYSIS: With Italy finally on the debt radar, almost every EU bank becomes dodgy.

For a long time now, The Slog has argued that Italy is doing a magnificent job of remaining low-profile in the debtor nation stakes. This piece from last year looks frighteningly accurate about the UK….and devastating on the subject of Italy. But since then, closer Italian links to the eurobanking community have come to light… well as Signor Berlusconi’s penchant for under-age Strauss-Kahnism.

The simple fact is this: EU bank exposure to Italian debt dwarfs not just Greece and Ireland – but also Spain. And as Spain has been billed as the most likely Bankfurt-breaker thus far, my Jewish accountant Maurie’s immortal analysis from 1982 applies: “John, now you should worry”.

Consider this: the top 91 banks have €100bn of Italian debt in their trading books. This is quadruple the trading holdings of Spanish debt, and 22 times holdings of Irish debt. Indeed, Italian debt is held in the trading books of Europe’s banks more than any other European sovereign – even German-issued debt totals just $70bn. Italian banks Intesa and Unicredit carry the greatest trading exposure to Italy, as one would expect. After that come Deutsche Bank and Credit Agricole, each with about €10bn. There is also the jiggery-pokery surrounding Barclays in this area, where there seems to be an enormous difference between what the Diamond merchants mentioned in the EU stress test, and what they had on their books soon after passing the, um, stress test.

A good graphic bar chart of this here also shows the exposure of HSBC, RBS, Banco Populaire and BPCE. The last of these – a French mutual – has been in my sights for several months now. Enjoying as it does the advantage that almost nobody outside France has ever heard of it, its exposure to Spanish cajas and crazily lent Italian property mortgages nevertheless makes it look a serious potential disaster area. The bank’s  hurried sale of certain peripheral assets only added to my unease: two weeks ago investment company Eurazeo confirmed that it’s one of the bidders for Foncia, the property management and real estate agency offshoot of BPCE.

The standard debtor nation mantra of  ‘nasty ratings agency makes tricky situation desperate’ is becoming hard to stomach – although Jeremy Warner in today’s Telegraph continues to hold this ‘self-fulfilling prophecy’ view. He notes:

‘….if the eurozone periphery crisis is seen as essentially a banking crisis which has transmogrified into a sovereign debt crisis, then Italy has little to worry about. Its banking sector is quite small relative both to others and to the size of the Italian economy….’

Mr Warner is, as so often, looking through the wrong end of the telescope: Italy is indeed a much larger Greece, for two reasons: one, insane lending to it by eurobanks which should have known better; and two, a quite alarming level of whoppers having been told to the naifs in Brussels.

S&P had every right to downgrade Italy: the country should, in theory, have been in pole position to tip the balance between core EU growth and periphery debt. The fact that  growth in the Italian economy has once more ground to a halt is not good news in that context, with the quarterly rate falling back from a 0.6% in Q2 2010, 0.5% in Q3, 0.1% in Q4 and 0.1% again in Q1 2011. This chart shows that very clearly:

We all know that the southern end of the euro is a bad joke. The question remains, what will the prime movers in the EU (France and Germany) do about the crisis in the end…..given that, as long as the Clubmeds remain in the euro, this will be a crisis without end?

Even if Hans in der Strasse would like to kick them all out at the first opportunity, this would be a disastrous eventuality for the German economy. And what’s disastrous for Germany must be catastrophic for France. The two obvious factors here are the near-certain bad debts on the books of everyone from Deutsche Bank to Credit Agricole; and the cost to the Big Two’s export drives of having the ClubMeds leaving the eurozone to adopt currencies of far less value. Frau Merkel would – literally – rather see Greeks starving than arrive at that impasse.

I am increasingly of the view that Merkel sees the ClubMeds as OstDeutschland2: she was, after all, an Osti herself. It seems to me that somebody has added up the numbers  for her – before advising, “OK Geli, the bottom line is that bailing these idle, lying latins out is going to cost shedloads of money….but not doing it is going to cost hanger-loads of money and wipe out our primary export markets.”

The address Angela Merkel gave to her Party last week strongly suggested that she would extract a massive price for the bailout. This price, I suspect, will be a fiscal EU Union policed (as in Geheime Staats Polizei) by the ECB, aka Bankfurt.

As I’ve posted before, this will leave Britain out on a limb. It would be nice, would it not, if there was the slightest sign that William Hague in particular – and the Coalition in general – had even thought about this….let alone come up with a way to deal with it

9 thoughts on “ANALYSIS: With Italy finally on the debt radar, almost every EU bank becomes dodgy.

  1. Add this to the analysis. The German economy and exports are flying. Imagine how they would be if Germany had the DM as before. It would be the most sought after currency in the world as a safe haven, and the value would price German exports out of the market. They would be able to buy everything for a song, but sell nothing.

    Germany are doing very well out of being in the same boat as the PIIGS.


  2. Tim
    This is what I meant by a ClubMed departure being disastrous for Germany’s export drive: it is entirely in her interests to see a poorly valued euro because of PIIG uncertainty.
    What I suspect Merkel hasn’t considered is suddenly waking up one day to find at least one of them in chaos thanks to food riots.


  3. Ah yes. My apologies. In fact you identified it twice. I would only encourage that the reasons “why” Germany is not upping and running from monetary union is explained in black and white as many (and DT is a classic) have no concept of why Germany et al stick with the Euro. Their only conclusion is Political Hegemony over Europe… I don’t dismiss that, but it the economic benefits must be in place before the politics can be sold. And to understand the current situation and how it may play out, it is critical to understand ALL drivers.

    BTW. The Slog has become a very interesting read in general. (Can’t believe one man can research and write so much). Hope you can keep it up. All the best.


  4. I can’t believe Italy has kept under the radar for so long. I thought Italy would be the one to bust the Euro long before the present crisis for the simple reason bolting in a country which is the past master of debauching its currency for immediate relief to another which defends its currency aggressively seems far from analogous in a currency union.
    I am also of a contrary opinion to Tim, I think without a political union a single currency can’t work. What seems to have happened is that the EU great and good wanted to impose political union on the back of a fiscal one only the differences in the multi-facets of the economics at play have rendered that dream impossible as the people rebel against the costs now the easy part of the economic cycle has ended and this exposes harsher political realities.
    The mann and frau on the street might like ‘easy’ exports but are they willing to work hard until 70yrs old to subsidise the likes of a Greek worker who retires at 50yrs? Politics is all about people’s perceptions and it’s easier to get a negative message across than sell a dream that has to be earned.


  5. ‘A fiscal EU policy policed by the ECB’?ClubMed does not believe in rules,or dictats from Frankfurt.Come October, the Germans will see the advantages of having their DM back.It will be much stronger against the dollar,cheapening imported oil and commodities.ClubMed consumption of German machinery and nice cars is price inelastic, so no problem there.Hans finds his summer holidays cheaper.OK, the German banks have to take a big hit ,but these guys were never going to repay 100 percent.Market discipline is restored,causing an abrupt fall in the standard of living around the Mediterranean.


  6. “ClubMed consumption of German machinery and nice cars is price inelastic, so no problem there.”
    Audis are nice, but so are Jaguars, and Lexus’s

    “it is entirely in her interests to see a poorly valued euro because of PIIG uncertainty.”
    I simply dont buy this.
    Germany (and China) have “won” nothing, they have exported vast amounts of actual wealth, and in return, have received empty promises of eventual repayment in return.


  7. I have been worrying about the privatisation programme and its likely effect.

    The IHT spells it out quite clearly on page 15 of its edition sold in France today. As I noted on my blog yesterday, this could well result in a return of the Colonels, who having withdrawn from the Euro and EU will simply take their “privatised” assets back. Thus making the entire exercise a farce.

    Hear, hear to Tim on the Slog’s progress!


  8. Pingback: ECONOMIC CRISIS: Old dogs require new tricks. Best prices paid | The Slog

  9. Pingback: GREEK BAILOUT TERMS: Anger around the EU as more austerity demanded for second bailout | The Slog

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