Here is a grapical representation of European national debts, with countries sized in proportion to their respective sovereign debts.
Notice that, excluding Greece, Eurozone's third largest economy, Italy, has the highest debt-to-GDP ration among these economies. And as expected, exacerbated by domestic political uncertainty, markets appear to be forming expectations about Italy following Greece, Ireland, Portugal and Spain into the troubled periphery of Eurozone, thereby completing the complement of PIIGS.
Admittedly, Italy's banks never speculated in a property bubble and are sound, its budget deficit at 4.6% of GDP looks low when compared to the sinners, and unlike other PIIGS Italian own more than half the country's debt. But as interest rates rise and with economy not likely to get back into high growth path anytime soon, it does not require much for the markets to tip the balance against Italy. And the indications look ominious.
As this Bloomberg ticker shows, the cost of insuring Italian sovereign debt against default have zoomed to its highest ever.
Italy is the largest issuer of government bonds among Eurozone economies and its 10-year Bond yields shot up alarmingly, again to its highest in recent history. And if rates exceed 6%, Italy will start experiencing the same repayment and new debt raising problems as others.
A contagion spread to Italy would make Greece and Portugal look like boy-scouts. As the Timess reports, European banks have total claims and potential exposures of 998.7 billion euros to Italy, more than six times the 162.4 billion euro exposure they have to Greece. European banks have 774 billion euros of exposure to Spain and 534 billion euros of exposure to Ireland. American banks are also more exposed to Italy than to any other euro zone country, to the tune of 269 billion euros. American banks’ next biggest exposure is to Spain, with total claims estimated at 179 billion euros.
Update 1 (28/9/2011)
List of "Who Gets Smashed If Italy Goes Bust".