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Something is brewing in Italy, and it isn't cappuccino.

A perfect storm threatens the country, as its mismanaged economy sinks deeper into the kind of dysfunction for which Mediterraneans are famous.

Particularly vulnerable is the country's banking sector, which is teetering under a mountain of quickly souring and unsustainable debt.

What is worse is that Italy's woes could drag down the rest of the European Union. Events on Tuesday concerning a major Italian bank are the surest sign yet that the downward spiral is accelerating.

One way to make a easy and quick killing from this Roman spectacle is to short the iShares MSCI Italy Capped Exchange-Traded Fund (EWI) , the benchmark for Italy's economy.

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But first, a little background.

Troubled Italian bank Monte dei Paschi di SienaTuesday announced a restructuring program that will include hundreds of branch closings, jettisoning toxic loans, new top management and thousands of job cuts. It is a last-ditch effort to lure investors into pumping up to €5 billion ($5.5 billion) in new capital into the troubled bank.

Trading of the bank's shares was suspended on Tuesday, after the stock plunged 23% in the wake of the news.

Bank Chief Executive Marco Morelli, who took the reins last month, said that the bank is seeking a new "anchor shareholder" to expedite the capital-raising effort, which had been announced under previous management.

Monte dei Paschi di Siena, Italy's third-largest lender, also happens to be the oldest surviving bank in the world, founded in 1472. It was the worst performer in a stress test this summer of EU banks.

The bank's shareholders are scheduled to vote on the austerity plan on Nov. 26, a week before Italy's crucial constitutional referendum on reforming the country's bloated government bureaucracy. If the referendum fails, the bank's prospective new investors would probably get spooked and the plan to raise capital would collapse.

Italy's prime minister, Matteo Renzi, has vowed to resign if he loses the referendum. Italy and Europe's leaders are unnerved by the latest polls, which show the "no" vote in the lead.

The upshot is that Italy is a mess and poses a danger to the entire eurozone. An Italian bank failure could be imminent, which in turn would spark financial contagion throughout the continent if not the world.

It would also fuel sentiment among white nationalists in Italy to follow the U.K.'s lead and agitate for leaving the EU, a disastrous scenario for Italy in particular and global investors as a whole.

The EU financial services sector is a ticking time bomb. The European Banking Authority estimates that struggling banks throughout the EU require as much as €470 billion euros ($517 billion) in financing to stay afloat.

The crisis is worst in Italy.

Italy is the third-largest national economy in the eurozone and the eighth-largest in the world. The economy is hobbled by anemic growth, astronomical unemployment, inefficient industries, political chaos and a banking sector that is plagued by ugly balance sheets. 

Italy's banks are saddled with €360 billion in bad loans, of which €200 billion are considered insolvent. Tuesday's events surrounding Monte dei Paschi di Siena indicate that the day of reckoning is getting closer for both Italy and the EU.

Investors who are looking for under-the-radar opportunities in an overvalued and shaky global equity market, should look to short the iShares MSCI Italy Capped ETF.

The ETF holds the country's largest blue-chip stocks, including construction and transportation giant Atlantia; industrial-goods conglomerate CNH Industrial; oil behemoth Eni;Luxottica, the largest eye wear company in the world; and money center bank UniCredit.

With net assets of $403.31 million, iShares MSCI Italy Capped ETF is down more than 17% this year and more than 24% over the past year. In coming weeks, as Italy's economic, financial and political institutions dance on the edge of the abyss, the ETF should continue its path downward.

Act now, before the rest of the investment herd catches on.


We just explained that Italy is on the cusp of a disaster that could undermine the entire European Union. But don't get complacent about America! A gathering financial storm is about to hit U.S. shores, too. When it hits, weak companies and their investors will be washed away. You need to put yourself on solid ground. And that doesn't just mean changing your investment allocations or loading up on cash. I'll show you how to protect yourself and prosper when you click here.

John Persinos is an editorial manager and investment analyst at Investing Daily.

At the time of publication, he owned none of the stocks mentioned.

Persinos appears as a regular commentator on the financial television show Small Cap Nation.Follow him on Twitter.