What's going on?

The Italian government is preparing to inject money into its banks in an attempt to stabilize a fragile situation � but it�s facing roadblocks in the form of European Union (EU) laws.

What does this mean?

Italy�s banks have far too many loans that are unlikely to get repaid in full. Banks balance the loans they give out against the deposits they take in from customers. And if the loans aren�t repaid then banks have to come up with the money in another way so that they can, ultimately, repay depositors. Banks often have to raise money from shareholders (e.g. sell new stock) to do this � which, of course, hurts the existing shareholders. The Italian government would like to give the banks money, but in a way that doesn�t hurt the shareholders (it�s kind of complicated – click here for more details). EU rules prevent such government assistance, and Germany reiterated its opposition to the idea on Wednesday.

Why should I care?

For the markets: This has the potential to be a big deal for markets. Investors pay close attention anytime there is trouble with banks. One reason, especially in Europe, is that banks� deposits (up to �100,000) are ultimately backed by the state in which the banks reside (e.g. Italy backs the Italian banks� deposits) � and so the health of Italian banks has the potential to directly impact the finances of the Italian state. Similar concerns exist in other European countries like, for example, Portugal. It�s a potential �systematic� risk for Europe.

The bigger picture: Political risk is back. Germany and France hold elections next year. Italy is having local elections soon. Spain just had an election that will (probably) result in an unstable coalition government. The Brexit vote could encourage support for other anti-EU political parties (although the opposite could occur too). For investors, political risk is usually a bad thing because it creates uncertainty and the potential for shocks (like the Brexit vote) – and that�s typically not good for stocks.