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Italy's Banks Stumble Into a New Crisis

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(Bloomberg Opinion) -- Spare a thought for Italian banks if you can. Barely recovered from their recent crisis, the country’s lenders find they have stumbled into a new one.

Rome’s populist administration has sent yields on government bonds soaring[1] by passing a budget that busts the EU’s fiscal rules. And since Italian banks still hold hefty amounts of those bonds, investors have taken fright, dumping the lenders’ shares.

The country’s finance industry is better placed to weather a shock than it was a few years ago. But the consequences of prolonged turmoil shouldn’t be underestimated. Banks could restrict credit, which would weigh on the economy. And were one of the weakest lenders to get into serious trouble, the Italian government would face some unhappy choices. That could cause a widespread loss of confidence.

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Following Italy’s long recession, its banks have been under severe pressure because of their big holdings of non-performing loans. Yet there has been an improvement. Bad loans made up 11.4 percent of the total loan

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