Italy Hoping For Temporary Exemption From EU Bank Rules To Stabilize Financial System

Italy may be the next epicenter of European economic turmoil. According to Bloomberg’s Melvyn Krauss, the extreme measures that Italy may need to take to right the ship could force its exit from the eurozone.

Italy’s non-performing loans currently represent 20 percent of GDP and the country’s public debt is 120 percent of GDP. Prime Minister Matteo Renzi wants to help struggling Italian banks without forcing investors to share losses. However, this plan is in direct conflict with European Union banking rules. Renzi has requested a six-month exemption from the rules, but Germany has objected.

If Renzi is not granted permission for his plan, he may choose to break the rules anyway rather than risk financial collapse in Italy.

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Societe Generale's chairman and former European Central Bank executive board member Lorenzo Bini Smaghi believes the EU needs to seriously consider granting Italy an exemption in the interest of self-preservation.

“We adopted rules on public money,” Smaghi said in an interview this week. “These rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied.”

Smaghi and others are concerned a financial crisis in Italy could further destabilize European economies that have already been disrupted by the Brexit.

So far this year, the iShares MSCI Italy Index (ETF) (NYSE: EWI) is down 25.4 percent.

Disclosure: The author holds no position in the stocks mentioned.