The Italian banking crisis we predicted seven months ago is here. The question is no longer whether there will be an Italian banking crisis; it is how badly the rest of the world will be affected. We will continue to track these developments as they unfold, but we must now look ahead: What ramifications will Italy’s troubles have on the United States? This report attempts to answer that question in some detail, but our main finding is the following.
The U.S. is not appreciably exposed to the Italian banking crisis directly. Moreover, the U.S. is not heavily dependent on exports and its direct financial exposure to Italy in general is limited. The problem for the U.S. is that it is much more exposed to France and Germany, which have significant positions in Italy despite the best efforts of their banks in recent years to reduce exposure to Italy.
All the while, lingering in the background, is the question of how the intricate and very large system of derivatives contr