Here Is Why Italy’s Debt Overwhelms Europe

February 4, 2019, | AtoZ Markets -Italian debt is still a problem that can cause a shudder of financial fear like no other. How will the current situation affect the course of the EU economy and what is the future of Italy?

Economical situation in Italy remains unstable

The most dangerous in EU government borrowing - about 1.5 trillion euros (1.7 trillion dollars) - is concentrated on the balance sheets of the Italian banks in Rome and Milan. However, according to the financial analysts, bankruptcy can quickly reach Italy lenders in Frankfurt, Paris, and Madrid - the main banks in the rest of Europe hold more than 425 billion euros of sovereign and private Italian debt, based on an analysis of data from the European Banking Authority.

The aggregate credit risk values for the general government and the private sector in Italy are calculated in accordance with the Standardized Approach and the approach based on internal ratings used by the EBA. According to the data, the largest creditors of Italy are France, Germany, and Belgium with loans of 285.5 billion Euro, 58.7 billion Euro and 25.2 billion Euro, respectively.

Despite the fact that the economy of Italy in the fourth quarter fell into recession, the markets are still calm. But the EU and Italy budget confrontation in the fall showed how quickly the mood can change. And if the markets direct their finances to the south, no one really knows where the turning point will come.

Economical collapse in Italy will affect France the most

As experts suggest, French banks are most vulnerable if a sale in Italy begins to affect the economy and spread through the financial system of Europe. The country's two largest banks, BNP Paribas SA and Credit Agricole SA, own retail units in Italy. The populist government, prone to civil strife and constant disagreement with the European Union, complicates the current situation and makes it so risky.

According to the financial analysts, to stay afloat, Italy needs to sell more than 400 billion euros a year, which makes domestic banks buy even more debt.

A government crisis in Italy can ruin the banking system, or a government crisis can absorb a banking crisis. Over the past three years, seven lenders have already requested financial assistance, and they may not be the last.

Who will save EU after Draghi and Merkel leave?

The rescue mechanisms in Europe were sealed during the last debt crisis when German Chancellor Angela Merkel held back the fiscal hawks, and European Central Bank President Mario Draghi flooded the market with liquidity. But Draghi will leave this year, and Merkel's power has weakened. In addition, Merkel will leave the post of leader of her political party. Worse, Italy’s financing needs would exhaust the existing potential for saving funds of the European Stability Mechanism, or 410 billion euros, in just one year. This would allow the upcoming European leaders to weigh the cost of combining their monetary union once again.

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