Italy, not Turkey, is the biggest threat to European banks right now, strategist says
Italy's economy is the third largest in the European Union and the country's new coalition government is currently working on next year's budget.
Investors are wary of rises in pensions and state benefits, given that Italy already has a significantly high public debt pile — the second largest in the euro zone, at about 130 percent of gross domestic product (GDP).
The European Central Bank (ECB) was reported Friday to be concerned that the ongoing currency crisis in Turkey could result in problems for the continent's banks.
However, the real problem for Europe's banking industry is Italy and what happens in that country in the coming months, an analyst said Tuesday.
"The issues in Italy… in the next three months are going to dictate the whole European banking narrative for the next three to five years," Tom Kinmonth, fixed income strategist at ABN Amro, told CNBC's "Squawk Box Europe."
Italy's economy is the third largest in the European Union and the country's new coalition government is currently working on next year's budget. Its financial plan will be closely scrutinized by European authorities and, more importantly, by market players, following promises to increase public spending.
Investors are wary of rises in pensions and state benefits, given that Italy already has a significantly high public debt pile — the second largest in the euro zone, at about 130 percent of gross domestic product (GDP).
If market players do not approve of the next budget, due around October, then borrowing costs for Italy are likely to go up, which in turn could affect neighboring European countries. It could also create problems for certain European banks that hold Italian debt.
Kinmonth said that apart from the budget, there are other events that could spell trouble for European banks. Ratings agencies are due to update their opinions on Italy in the coming weeks; the Italian banks still hold a high level of non-performing loans; and the uncertainty surrounding politics in Rome are making it increasingly difficult to predict what might happen to banks as a result.
In the aftermath of the 2011 sovereign debt crisis, investors have become suspicious of contagion risks across the euro zone.
"The Turkey issue is something on the radar, but it is far more idiosyncratic at a bank level and all eyes will be on Italy," Kinmonth said.
