Italy could soon be the next Britain.



EUR/USD has slipped and bank stocks in Italy slumped as the country may be headed for a period of political and financial turmoil.

Prime Minister Matteo Renzi said early Monday that he would resign after his program of constitutional reform was rejected by Italians in a referendum, with the 'No' campaign winning nearly 60% of the vote.

The prospect of instability in the eurozone's third biggest economy saw the euro drop about 1% against the dollar to around $1.05 in Asia trade, its lowest level in 20 months.

Italy's main stock market index fell by more than 1% but European stocks were otherwise trading slightly firmer and U.S. stock futures were also positive.

Global market reaction was relatively muted, perhaps because Renzi's defeat was expected.

It's unclear what happens next in Italy. Renzi's party may be asked to form a new government, perhaps in coalition with the center right. If all else fails, there may be early elections in 2017.

The most immediate concern is a potential banking crisis. Some of Italy's banks are drowning in bad debt - a legacy of years of economic stagnation - and urgently need to raise new funds.

The world's oldest operating bank, Monte dei Paschi (BMDPF), is the weakest link. It needs 5 billion euros after failing a test of its financial health earlier this year.

Italy's economy, which has been stuck in neutral for decades, is also likely to suffer. Renzi's government had embarked on a series of reforms aimed at boosting growth and prosperity.

Many of those are incomplete or still in the pipeline, and progress is now likely to stall. New elections could take place, but they may be many months away. Economists expect growth to weaken sharply next year, and some say a return to recession is possible.

Investors see Italy as the biggest risk to the future of the eurozone, and they've been selling the country's bonds in recent weeks.

Still, the likelihood of one of the European Union's founding members abandoning the euro is very remote. There are significant constitutional and political obstacles to such a move.

The European Central Bank, which meets Thursday, could announce even more aggressive measures to support the European economy.