Italy’s Prime Minister Matteo Renzi of the Democratic Party (PD), still reeling from a series of recent mayoral losses to the populist Five Star Movement, is now facing the biggest challenge in his political career: a major bank crisis from accumulated bad debt.

In just three months, Italians will vote on a referendum regarding constitutional reform on which Renzi is gambling his ministry. If the referendum fails to pass, Renzi has promised to step down, turning the referendum into a confidence vote for his government.

Yet right now Italians are staring at a financial crisis provoked by an incredible €360 billion in non-performing loans linked to decades of banking mismanagement, along with an out-of-control immigration problem that seems to be gaining momentum rather than slowing down.

None of this bodes well for Renzi, who made his imprudent wager on the constitutional reform referendum when his popularity was considerably higher than it is now.

In June, the populist Five Star Movement (M5S) won local elections in 19 Italian cities, including Rome and Turin, and is now ahead of the PD in national polls. The remarkable success of M5S, a Eurosceptic party, underscores Italians’ frustration with Brussels and a return to nationalism.

Meanwhile, the accumulation of bad debt is now equivalent to a fifth of the country’s GDP and represents about 18% of total outstanding bank loans.

Bank runs have already begun in parts of Italy, with panicking clients emptying automatic tellers of cash, and some banks have reacted by drastically lowering the total sums that may been withdrawn by depositors in the course of a single month.

The bank whose financial health has suffered most acutely happens to be the world’s oldest banking establishment, the Monte dei Paschi di Siena, which has been in operation since the year 1472.

The problem does not only concern Italy, either. Analysts suggest that bank collapses in Italy could lead to a major financial crisis throughout the Eurozone, because of the interconnectedness of financial markets. The risk of contagion is most acute for the French, whose total exposure to Italian debt exceeds €250 billion.

In late June, however, Germany vetoed Italy’s request for a bail-out of failing Italian Banks, which reportedly would require some €44 billion just to stay afloat.

Since January 2016, reformed Eurozone laws have severely restricted what governments may do to help struggling banks, meaning that banks are obliged to draw first from the funds of private investors before authorities may use public money to recapitalize banks.

In the case of Italy, a crisis “bail-in” would wipe out not only shareholders, but also ordinary depositors who have been sold €173 billion worth of questionable bank debt. If this were to happen, the fall of the Renzi government would be assured.

The stocks of Italian banks have declined by an astonishing 68 percent overall since the beginning of 2016, reflecting the growing fear that Italy’s financial sector is on the brink of collapse.

Italy is still languishing from an ongoing economic slump that has exposed banks to numerous bad debts from failing businesses. Last week the International Monetary Fund (IMF) forecasted that Italy’s economy would be unable to return to its pre-crisis size until the mid-2020s, meaning “nearly two lost decades.”

The IMF blamed Italy’s dismal productivity growth on the country’s high taxes, along with an “inefficient public sector” and civil service wage hikes.

By the end of July, EU banking regulators are expected to rule that Monte dei Paschi di Siena needs an emergency infusion of capital, which will be the first step in a rescue operation for the entire Italian banking sector.

Renzi is now trying to convince Brussels and skeptical EU member countries to allow Italy to inject money into the banking sector without triggering the bail-in condition.

As Italians begin to head out for the yearly August holiday exodus, they are anything but certain what situation their banks will be in upon their return. And Matteo Renzi is anything but certain that he will still be Prime Minister come Christmas.

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