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• Italy has come to the bond markets’ spotlight due to high level of debt combined with weak growth prospects.
• Successful execution of the fiscal consolidation program is required to lower borrowing costs and put debt dynamics on a sustainable path.• Successful implementation of structural reforms would boost the country’s long term potential economic output and allow public debt to decline faster.• On the positive side, healthy private sector balance sheets imply that there is potential to fund the public sector.
• Italian banks are vulnerable to sovereign risk due high exposure to government bonds. However, the banking sector fundamentals remain solid.