Just a few short months ago, many people assumed that Italy would be, at worst, the fourth or fifth country to topple in Europe’s debt crisis, certainly after Greece, and probably after Ireland and Spain and Portugal.
But now — thanks, in no small part, to poor management under Silvio Berlusconi’s government — the panicky headlines are all focused on Italy. Even though Berlusconi has said he’ll step down, the country’s borrowing costs are now soaring to unsustainable levels. Yesterday, Barclays put out a report warning that “Italy is mathematically past the point of no return” and that the European Central Bank had to come up with a far more drastic approach than what it’s already doing.
That’s a huge problem because, well, Italy is a huge country, the world’s eight-largest economy. Reuters has created a handy interactive chart showing what other nations’ banks are most exposed to Italian debt:
You can play with the map to see bank exposure for all European countries. Notice that U.S. banks have relatively little exposure to the five most troubled nations (Portugal, Italy, Ireland, Greece, Spain), something Treasury Secretary Tim Geither has stressed. But that doesn’t mean we’re in the clear. As Desmond Lachman, a former IMF official, told me last week, “We may not have much direct exposure to the periphery, but we’ve got exposure to bets in Europe that have exposure to the periphery. And that means we’ve got exposure.”
Some of this comes through on the map. Who has the most exposure to Italian debt? French banks. And who has the most exposure to French debt? Banks in the United Kingdom and the United States. And who has the most exposure to British debt? Yep, us again. If Italy goes down, the United States won’t necessarily escape unscathed.