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Italy's banks face twin test

Tuesday, May 30, 2017

Significance

Former Italian Prime Minister Matteo Renzi has suggested that Italy's next election should be held at the same time as Germany's (September), saying it made sense from "a European perspective". Investors fear for the impact that a combination of early elections and ECB policy tightening would have on the fragile Italian banking system.

Impacts

  • An Italian sovereign default is manageable if Italy remains in the euro and accepts the loss of sovereignty a rescue package implies.
  • Italy would likely impose capital controls if it left the euro, triggering a crisis in less prosperous members, possibly ending the euro.
  • Italy is, after Germany, the largest manufacturer in Europe and Italy is one of the wealthiest European countries, underpinning ECB support.
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