20110914 french bank logos
Logos of French banks Societe Generale, Credit Agricole and BNP Paribas in Rennes, western France. - 

Jeremy Hobson: Now to Italy, which is facing a crucial economic test this morning as it sells nearly $7 billion in government bonds. As we told you yesterday, the country is now paying more than .

The buyers of that debt could be Europe's big banks, but they're in a tough spot -- as Christopher Werth reports from London.

Christopher Werth: Europe is locked in something of a Catch 22. On the one hand, political leaders have gotten tough on banks. Banks have been forced to mark down the value of shaky debt from Greece and other countries. For instance, banks will only get back 50 percent of what they lent to Greece.

On the other hand, that weakens their ability to lend as much as they normally would. And when governments want to borrow more money, they depend on those same banks as the main buyers of their bonds.

Carsten Brzeski, an economist at ING, says it's similar to the way U.S. banks -- faced with tighter regulations -- stopped lending to businesses and consumers after Lehman Brothers collapsed in 2008.

Carsten Brzeski: Here it's less the eurozone consumers, but it's the governments. They need someone actually buying its bonds. And if you need to find a buyer, but no one's buying it, then you have a real problem.

That is, with banks no longer buying bonds, the cost of public borrowing goes up, pushing countries like Italy closer to the edge of default.

In London, I'm Christopher Werth for Marketplace.