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Why Italy could be the epicenter of the next financial crisis

A negative report on the proposed budget by Fitch ratings on wednesday has injected extra anxiety into the budget negotiations. www.nytimes.com

History suggests that the world is about due for another financial crisis. One of the places it might start, according to a growing number of indicators, is Italy. Many of the ingredients are there. A pile of questionable debt. Weak banks. An erratic government. And a sizable economy able to inflict collateral damage outside Italian borders.

Bond investors, always good for a coldblooded appraisal of a country’s solvency, have been sounding the alarm. The Rome government’s populist spending plans, widely regarded in financial circles as reckless, have caused market interest rates on Italian debt to spike, threatening to create a so-called doom loop that would ripple through the struggling economy.

The proposed budget has exposed the seams in Italy’s governing coalition, where one party favors small-business-friendly tax cuts and the other enormously expensive welfare programs. More broadly, it has divided the populist government, which has vowed to press ahead with a budget it views as a political imperative, and the Italian financial establishment, which fears what the spending will do to the country’s economy and its credibility and relationship with Europe.

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