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Is Italy about to start another European banking crisis?

Ever since the GFC a decade ago there have been question marks about various countries in the EU economy.

Prior to Brexit, Germany, the UK and the Netherlands had recovered well from the financial crisis. But, Greece in-particular was on life support for years with bail-outs. Italy has never been in a strong position since the GFC.

Ambrose Evans-Pritchard wrote for the UK’s Telegraph that Italy is on the brink of a dangerous banking crisis as political tensions sent the country’s borrowing costs to a five-year high.

Italy, and many of the indebted European nations, have benefited from interest rates being driven to all-time lows, which help afford the debt. But it wasn’t going to last forever and now their big debts may cause trouble.

What will the fallout be?

Invariably this type of thing blows over when everyone comes to the table. Even the Greeks managed to come to an agreement with the EU and the central bank. That’s the most likely outcome.

Some have speculated that Italy will leave the Euro, being in the currency may not be helping the poorer countries compared to how Germany is benefiting. There has always been a question of mixing a political union with a monetary union like the EU and the Euro – there are many different voices at the table with different finances and different agendas.

What is happening for certain is that markets are getting jittery and sending valuations down, as well as the continuing Trump and China trade war. The ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) is down another 1% today with shares like Commonwealth Bank of Australia (ASX: CBA) down 1% and CSL Limited (ASX: CSL) is down 3%.

It’s this type of development that makes me wary of holding businesses with excessive debt or ones that could suffer from contagion, like the big Australian banks such as Australia and New Zealand Banking (ASX: ANZ).

That’s why I’m really interested in this top share which is so defensive its profit could grow quicker in a market downturn.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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