Europe’s most dangerous stock of public borrowing—some 1.5 trillion euros ($1.7 trillion)—is concentrated on the balance sheets of banks in Rome and Milan. But a rout could quickly sweep in lenders in Frankfurt, Paris and Madrid—the main banks in the rest of Europe are holding more than 425 billion euros of sovereign and private Italian debt, based on a Bloomberg analysis of European Banking Authority data.
Although Italy’s economy slipped into recession in the fourth quarter, markets are calm for now. But a budget standoff in the fall showed how swiftly sentiment can turn. And if markets should turn south, no one knows exactly where the tipping point will come.
French banks are the most exposed if a sell-off in Italy starts to affect the economy and spread through Europe’s financial system. The country’s two largest banks, BNP Paribas SA and Credit Agricole SA own retail units in Italy.