Scott Sumner refers to The Second Domino. Via Kevin Drum, the WSJ reports:

In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.

This is potentially a bigger story than Brexit, as it has the potential to bring the entire eurozone to its knees. The notion of a bail-in already has been discarded, with Merkel’s blessing, as most people realize that would lead to unmanageable runs on eurozone banks.

Italy is the third largest economy in the eurozone, and so it is not so easy to bail out on a large scale. Germany and France have elections pending, and they are not keen to put in money in any case, not after the Greek debacle. In terms of per capita income, Italy has not seen real growth in over fifteen years, and so a bigger than expected bank bailout would be tough for them to swallow.

Here is Zero Hedge for one of the more dramatic views.

In principle an Italian wealth tax could pay off the implied debts, but that is probably unacceptable; an attempt at such a tax was repealed rather rapidly a few years ago. Otherwise Italy is short of money and Germany doesn’t want to be left holding the bag, with that commitment being tougher to swallow once various country “exits” are on the table. In terms of politics, Italy is possibly facing a constitutional crisis and governance vacuum of sorts, with a pending referendum and no option in sight to make the people happy.

The key is to avoid potential bank runs and Italy and elsewhere, but how? It’s not that hard or costly to switch money from one eurozone bank to another, and the Italian government is counting on a lot of inertia here. So this is a tough one.