Of the three issues facing traders today — earnings, Italy, and the debt ceiling — Italy is the bigger problem.
It is NOT NORMAL for big European banks to be down 5 to 10 percent (ING down 9.6 percent in one day!), particularly on top of 5 percent declines or worst last week. (Counterpoint — Goldman's O'Neill says S&P hangs on China, not Italy)
What's happening: traders are throwing in the towel on predicting the end of sovereign problems in Europe. (At a glance: Sovereign Credit-Default Swaps)
Why does the U.S. care? Greece, Portugal and Ireland might be manageable...but unhedged exposure is definitely higher for U.S. banks in Italy...plus you will clearly get contagion in the credit markets...markets freeze up.