When In Rome

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What's going on?

Shares of Italian banks fell on Tuesday as the country’s government suggested that it’s unlikely to budge on its high spending plans.

What does this mean?

Last week, Italy drafted a budget to spend 2.4% more than it earns. It’ll have to borrow the difference, which will push its already mountainous debts into Apennine territory – and further breach the European Union’s rules (a country’s debt should be less than 60% of the size of its economy – Italy’s is a third bigger). Italy might be asked to figure out a way to spend less, but the government’s resisting (keen to satisfy voters who want higher spending and lower taxes). The country’s rising debts make it more likely to miss a repayment (a.k.a. default) – in part leading investors to sell government bonds.

Why should I care?

For markets: Banks left holding the baby.

Italy’s domestic banks – like Unicredit – are major investors in the country’s bonds (in January, they owned over $700 billion of Italian debt, according to the Financial Times). This debt makes up just under 10% of Italian banks’ total holdings, on average, so defaults would likely take a real toll – and banks aren’t as fast-moving as some other investors, who’ve already gotten out of dodge by selling Italian bonds in recent days. Losses can beget further troubles if banks think that other banks are at risk of failing to pay their debts, and charge them higher interest or stop lending to them altogether in response.

For you, personally: Your money in European banks is safe, to a point.

In 2007, UK bank Northern Rock was caught short of cash as the global financial crisis came to a boil and its customers rushed to get their money out while they could. Nowadays, savers have less reason to worry. In Europe, bank deposits up to €100,000 (or around $115,000) are guaranteed by the government (so you don’t lose cash if a bank goes bankrupt).

Originally posted as part of the Finimize daily email.

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