Last updated on December 3rd, 2018

The French megabanks are in the hook after a start remainder worth 277 billion euros.

There is 277 billion Euro worth of Italian government debts owed to French banks which make up 14% of the French GDP. This could mean a huge problem given that the Italian government is in a big row with the European Commission and the ECB over it 2019 budget plan. Bruno Le Maire – the French finance minister on Friday, urged the commission to “reach out to Italy” after it had rejected the 2019 budget plan for not following the EU regulations on public spending. Le Maire also said that although the contagion in the Eurozone has been contained, the Eurozone is not adequately armed to withstand a new threat whether economic or financial.

A fact well-known to Le Maire is that a full-blown financial crisis in Italy would spread to France’s economy eventually through the French mega banks as the primary transmission route. However, France is not the only Eurozone country been exposed to the unhealthy level of Italian, although it is most involved and exposed of them all. According to a report from the Bank of International Settlements, German and Spanish lenders have 79 billion and 69 billion Euros worth of exposure to the Italian government respectively. This means that, when put together, the financial sectors first largest, second largest and the fourth giant economies in the Eurozone – Germany, France and Spain have over 415 billion Euros of Italian debts on their balance sheet.

While the German lender exposure to the Italian debt has significantly reduced over the recent years, that of the French lender has seen an increase. This increase has gone against the ECB’s claim that its QE program can help reduce the interdependence level between the banks and the European sovereigns. In fact, the opposite is what has happened; due to the ability of banks to buy bulk government bonds at zero risk officially. This is thanks to the ECB’s effort to undermine the Eurozone’s bond market by making sovereign bonds risk-free virtually.

A couple of years back, Germany, Finland and the Netherlands tried to bring an end to the practice by having the risk-free status removed from some risk-prone sovereigns bonds. However, French, Spanish and Italian bankers and politician opposed the motion due to fear of market mayhem resulting from such decision. Today, the chaos is still looming around, and the Italian draft dispute is offsetting investors. Although, in a positive light, investors are not yet out rightly afraid of the stability of the Eurozone as seen in the low rise of the Greek sub-index and the drop of the contagion risk index which dropped to 33% from 36%.

But this exposure by the French and German to the Italian debts means that the countries are more like to find a compromise in the current stand-off over the budget plan issue. The Italian government know this very well, and this knowledge is fuelling the government’s bravado and making some lawmakers talking about a possible extension of the Italian government funds to the Italian banks that are struggling in the case of worsening economic situations.