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…..as 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