Italy And Systemic Risk In The United States

By Simon Johnson

In recent days, Greece’s parliament adopted new austerity measures and Europe’s finance ministers approved another round of Greek loans. So the European debt crisis is under control, right?

Probably not. One obvious reason is Standard & Poor’s July 4 threat to declare a default if banks roll over Greek government bonds coming due over the next year. That could force everyone back to the drawing board.

Less obvious, but no less worrisome, is Italy. With a precarious fiscal picture, it could be the next to come under pressure. And this time, U.S. banks are in the line of fire, with about $35 billion in loans to Italy and potentially more exposure to risk through derivatives markets.

U.S. regulators should call for a new round of stress tests that assume sovereign-debt restructurings in Europe and take a realistic view of counter-party risks in opaque markets such as foreign exchange swaps. Based on those tests, the biggest banks probably need to suspend dividends and raise more capital as a buffer against losses.

To read the rest of this post, click here (this link is to the full article on Bloomberg: http://www.bloomberg.com/news/2011-07-05/could-italy-be-next-european-domino-to-fall-commentary-by-simon-johnson.html)

15 thoughts on “Italy And Systemic Risk In The United States”

  1. We’ve seen this coming, for a long time. Nations are getting away from the U SD. All fiat currencies go to zero, but the Federal Reserve is hastening the end. Buy gold and silver. Hang on to it. It is real money.

  2. Yes George, they sure are “running for the exits” aren’t they???? Uuuuuuh, like NOT!!!!!
    http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201106281838dowjonesdjonline000379&title=bullardfed-approved-renewal-of-dollar-swaps-with-foreign-banks
    The ECB has run to the U.S. Federal Reserve so many times for loans, they make the Fed feel like some “Mommy” getting a call from her college freshman son after his 10th drinking binge in Vegas.

    George, you been listening to Glenn Beck, reading Ron Paul (alias “the wingnut”), or watching too much FOX circus freak acts??? I am for the “average joe” getting his 2 cents in and basically an egalitarian, but when it comes to doofuses repeating falsities they heard from right-wing sensationalists—it’s kind of where I draw the line.

    Let me add for the record (I have the oddest 6th sense this will be lost on George), the biggest threat for the USA economy now is more likely to be people hoarding their money, not inflation. In which case they will be holding dollars and spending dollars, not trying to make change for gold bars at the 7-11 store with Mowla from Bangladesh.

  3. $35 billion? That’s it?

    With sovereign debt at EUR1800-2000 billion Italy is surely the elephant in the sovereign debt room, but if $35 billion is the exposure of US banks, it does not sound very threatening.

    If Italy defaults, French, British and German banks will go bankrupt, the Euro will break down and we will go in “God-we-are-all-going-to-die” mode, and then we will have a real problem. But not because of those “puny” $35 billion.

  4. @ DiSc

    Its the derivative markets, aka… AIG, Lehman, Bear Sterns, etc., etc., etc,…

    Ref: CMO’s (ABS’s & CDO’s), CDS’S and MBS’s (Alt-A & Tier 3 & RMBS & Sub-Prime/ NINJA) all in a unregulated dark (Naked Swap’s) cesspool of shadow banking?

    Spot On, Simon

  5. Hey George, more news for those that start the morning reading “Drudge Report” and end the day watching FOX “news”.
    http://www.bloomberg.com/news/2011-07-05/dollar-strengthens-as-asian-stocks-snap-five-day-rally-wheat-rice-jump.html

    Come to think of it, this could be the reason Republican Presidential candidate Michele Bachmann needs her “family farm” (in Wisconsin, not Minnesota) and her husband’s health clinic subsidized by hundreds of thousands of U.S. federal government dollars. No word yet from the Tea Party on if they consider Bachmann’s subsidies as welfare or not. Maybe the new Tea Party platform is “If you get free money from the federal government and if your last name is Bachmann, it don’t count as ‘income redisturbootion'” (pronunciation errors and bad grammar thrown in for Tea Party realism)
    http://www.latimes.com/news/nationworld/nation/sc-dc-0627-michele-bachmann-20110626,0,7255963.story

    http://www.latimes.com/news/nationworld/nation/la-na-bachmann-20110626,0,1896024.story

  6. @Moses Herzog

    While I agree there is a tendency among Tea Party enthusiasts to favor abolition of fiat currency, the converse is not true. I know plenty of left-leaning people who also think fiat currency is inherently a Ponzi scheme or other type of scam and long for the return of gold. (No, I am not among them.)

    The irony is that the current theatrics about US national deb-limits and deficits, etc., actually are predicated on assumptions that are simply wrong as applied to fiat currencies. Politically, the US Congress and President are already acting _as if_ we had a commodity currency or some other externally opposed constraints on our monetary policy, when in fact the reality is otherwise. So I’m not sure what these people (left or right) think return to gold would accomplish for them, but that is what they advocate.

  7. I think Moses just needs a good trusting. Two asprin and he’ll be fine in the morning.

  8. Well, if anyone’s interested, a gentleman named Bill Still pointed out to me last Saturday that any time a currency is based on gold, silver or any other commodity–ANY TIME–, those in power simply corner the market on that commodity and hoard it, ultimately leaving most of the population in debt slavery. Or some people call it serfdom.

  9. Tick, tick, tick, tick…..it’s going to hit the fan very soon. But it’s fun to pretend everything is under control and will be alright.

    “2. No one has been punished. Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide , along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains. But they aren’t in jail. They aren’t even under criminal prosecution. They got away, scot free. As a general rule, the worse you behaved from 2000 to 2008, the better you’ve been treated. And so the next crowd will do it again. Guaranteed.”

    “3. The incentives remain crooked. People outside finance — from respected political pundits like George Will to normal people on Main Street — still don’t fully get this. Wall Street rules aren’t like Main Street rules. The guy running a Wall Street bank isn’t in the same “risk/reward” situation as a guy running, say, a dry-cleaning shop. Take all our mental images of traditional American free-market enterprise and put them to one side. This is totally different. For the people on Wall Street, it’s a case of heads they win, tails they get to flip again. Thanks to restricted stock, options, the bonus game, securitization, 2-and-20 fee structures, insider stock sales, “too big to fail,” and limited liability, they are paid to take reckless risks, and they lose little — or nothing — if things go wrong.”

    “4. The referees are corrupt. We’re supposed to have a system of free enterprise under the law. The only problem: The players get to bribe the refs. Imagine if that happened in the NFL. The banks and other industries lavish huge amounts of money on Congress, presidents, and the entire Washington establishment of aides, advisers and hangers-on. They do it through campaign contributions. They do it with $500,000 speaker fees and boardroom sinecures when you retire. And they do it by spending a fortune on lobbyists — so you know that if you play nice when you’re in government, when you retire, you too can get a $500,000-a-year lobbying job. How big are the bribes? The finance industry spent $474 million on lobbying last year alone, says the Center for Responsive Politics.”

    quoting:

    http://www.marketwatch.com/story/the-next-worse-financial-crisis-2011-07-06?dist=beforebell

  10. Gentlemen, for the record I have not watched TV in 3 years. I do not make myself the property of any politician, a constituent. I read Black’s Law Dictionary for fun. Before you jump me with your false and erroneous assumptions, look at the legal definition of “United States citizen”. I am not one of those 14th Amendment imported statutory persons. I couldn’t care less who the President is, or who is running for public office..

  11. This country is really poor now, and getting poorer. Crime really does pay, if you’re connected, and mobbed-up. Simon and others have been saying Italy presents more risk, than much smaller Greece, and that’s correct, of course.

    The only solution is a unilateral DEBT MORATORIUM by the PIIGS, as the amounts owed are un-payable and un-collectible. Does western europe, or USA for that matter, really want enterprising rackets embodied in firms such as Goldman Sacs owning its’ national treasures, its’ waterways, its’ roads and bridges, and any other asset they can lay claim to? There is where its’ going, and the Greek resistance is only the beginning of massive social upheavals that unprecedented theft, greed, and cunning is visiting upon humanity.

    Just look skyward, and see what the monsters are doing to our skies.

  15. “This is a warning to prepare for potential stealth bank runs cascading from North Africa and Ireland through to EU regional banking centers.”

    “Stealth bank runs are the unrecognized and perilous serpent lurking presently below the European financial surface. They prey on slower moving archaic bond vigilantes and anyone else swimming in these dangerous uncharted waters.”

    http://www.zerohedge.com/article/guest-post-beware-lurking-north-africa-eu-bank-runs

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