The UK’s central bank claimed a fresh banking crisis in Italy could not only put the EU’s economy at risk but it could also have a destabilising effect on Britain. UK financial institutions do not own much Italian debt. However, debts from Rome have “much higher claims on countries with close links to Italy, including France and Germany”.
The Bank said: “Although direct UK banking exposures to Italy are low, if financial strains were to spread across the euro area, there could be a material risk to UK financial stability.”
Big French and German banks own billions of Italian sovereign debt.
BNP Paribas had €9.8billion (£8.7billion) at the end of 2017, BPCE had €8.5billion and Crédit Agricole €7.6billion, the Telegraph reported.
According to the Bank of England’s report: “UK banks were resilient to the 2018 stress test, which incorporated a synchronised global downturn in output growth as vulnerabilities across financial markets and the global economy crystallise.”
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However, the report claimed Italian banks were much more exposed to the risk, as they almost have a tenth of their assets in sovereign debt.
Italy’s debt has ballooned to more than £2trillion (€2.3trillion) and their coalition government wants to increase spending on welfare and infrastructure.
The Italian government is embroiled in a bitter row with Brussels over their budget deficit, which Italy’s populist coalition government wants raised to 2.4 per cent in 2019.
Rome’s debt is more than £1.7trillion (€2trillion) and 131 percent of its GDP, the second highest in the EU after Greece.
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European Union rules state countries must restrict national debt to 60 percent of GDP or less.
But with the last Italy government submitting plans to slash the deficit to 1.6 percent this year and then to 0.9 percent and 0.2 percent, EU leaders are demanding Rome’s new government to get in line as they are worried about the rise of a “doom loop” in the country.
On Friday, Jean-Claude Juncker sent a stern warning to Italy calling on the Italian Government to stop “turning its back to Europe”.
Speaking at a G20 summit press conference with Donald Tusk, the European Commission President called on Italy to return to being “the Italy it always was”.