Italian government debt is already over 130pc of GDP, more than double the 60pc limit set out by the EU. Some are worried about the emergence of a “doom loop” in the country, where financial issues can lead to problems with sovereign debt, and vice versa. Italian bad debts already account for a quarter of all of these loans in the eurozone. Some banks may also have to re-price their Italian sovereign debt assets, which may be less valuable than when they bought them due to the increased risk. This increased risk could in turn be passed on to households and businesses, through increased rates on loans and mortgages. This could lead to an increase in non-performing loans, according to the Bank. In turn this could have a dampening effect on the economy at large as consumers have less money to spend, and businesses find it more expensive to borrow and invest. The Bank said it runs “stress tests” to model financial risk to the UK coming from overseas, including from Italy. “UK banks were resilient to the 2018 stress test, which incorporated a synchronised global downturn in output growth as vulnerabilities across financial markets and the global economy crystallise”, it wrote in the report. Italian banks are far more heavily exposed to the risk, having around a tenth of their assets in sovereign debt.
UK banks may be at risk from Italy's national debt, which stands at 60% of gross domestic product, more than twice the more than 130% EU limit. The Bank of England warns of a "doom loop", in which problems with Italy's banks spread across Europe; French and German lenders have especially high exposure to the country's debt. While the UK is more isolated, the toxic situation could lead to higher rates on loans and mortgages and an increase in non-performing loans.