Italy's banking crisis is yet another red flag for the eurozone

THE changing of governments in Italy is normally a fairly routine affair, but the resignation on Wednesday of Matteo Renzi, Italy's 63rd prime minister in 70 years, could have potentially serious implications - not just for Italy but also for the eurozone.

Mr Renzi's resignation came following a constitutional referendum that he called with a view to changing the structure of government to enable more efficient decision-making. But in reality, it was more a referendum on the performance of Mr Renzi's own government after two and a half years in office. The verdict was thumbs down from 59 per cent of Italian voters.

With Mr Renzi gone, Italy will be ruled by a caretaker government until elections (scheduled for 2018) are held. While such a state of political limbo is not uncommon in Italy, the stakes this time are unusually high. Burdened with non-performing assets (NPAs) totalling some 360 billion euros (S$550.3 billion), equivalent to a colossal 20 per cent of GDP, Italy's banking system is fighting for its life. Political uncertainty will make this fight harder.