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Italy’s Fragile Finances Have a $2.4 Trillion Virus Problem

Investors are turning their attention to one of Europe’s biggest time-bombs: Italy’s stressed financial system.

Italy’s Fragile Finances Have a $2.4 Trillion Virus Problem
A commuter, wearing a protective face mask, waits on the platform for a Milan Metro subway train in Milan, Italy. (Photographer: Alberto Bernasconi/Bloomberg)

(Bloomberg) -- Investors are turning their attention to one of Europe’s biggest time-bombs: Italy’s stressed financial system.

The coronavirus outbreak and the resulting lockdown will have a significant impact on gross domestic product, and Italy plans to spend as much as 25 billion euros ($30 billion) to blunt the damage of a nationwide lockdown to businesses and individuals.

That means Europe’s most dangerous stock of public borrowing—some 2.4 trillion euros mainly on the balance sheets of banks across the European Union—is going to get bigger.

Exposure to Italy

Italy’s Fragile Finances Have a $2.4 Trillion Virus Problem

European banks outside of Italy are holding more than 446 billion euros of sovereign and private Italian debt, based on a Bloomberg analysis of European Banking Authority data. As the coronavirus outbreak spreads to other countries, the Italian debt will be a double burden to financial systems dealing with economic pressure at home.

Double Trouble

Italy’s Fragile Finances Have a $2.4 Trillion Virus Problem

French banks are the most exposed among non-Italian lenders if a sell-off in Italy starts to spread through Europe’s financial system. The country’s two largest banks, BNP Paribas SA and Credit Agricole SA own retail units in Italy. Bank of France Governor Francois Villeroy de Galhau will propose changing capital rules for banks at a meeting of France’s stability council next week.

Doom Loop

Italy’s Fragile Finances Have a $2.4 Trillion Virus Problem

The Italian government has to sell more than 400 billion euros a year to keep its debt in check, which forces domestic banks to buy even more debt, a situation known as a doom loop, where a weak economy and weak banks feed into each other.

Fallout from the coronavirus outbreak  could undo years of painful restructuring by Italian banks. A prolonged lockdown in Italy may boost bad loans that banks have worked for years to reduce and revive the specter of bailouts, sending the whole sector into a crisis.

A Mediobanca SpA spokesman said the bank’s own calculations, which are different from the EBA’s, put its net exposure to government securities much lower at 2.66 billion euros. That includes 150 million euros in state-owned companies.

--With assistance from Demetrios Pogkas.

To contact the editor responsible for this story: Ross Larsen at rlarsen2@bloomberg.net, Ben Sills

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