In the final weeks of 2016, the Italian banks’ saga threatened to unsettle the euro area. The failure to implement a market recapitalization of Monte dei Paschi di Siena (MPS) led to a sizable state intervention. Public money was necessary to soften the impact of the bank’s resolution for thousands of depositors who, mostly unaware of the risks, had bought—or sometimes were fraudulently sold— subordinated MPS bonds intended for professional investors. A number of other pending problems in the Italian banking sector made analysts posit a potentially hefty price tag for the Italian government if the rest of the domestic financial system needed to be shored up. Given the high level of Italy’s public debt, such an extraordinary intervention would have put its sustainability at risk. Some analysts even doubted Italy’s permanence in the euro.

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