"I'll cut to my conclusion," American financial theorist John Maudlin asserted in a lively Saturday newsletter."There is a high degree of probability (approaching 90 per cent, I'd say) that Italy will experience a severe banking crisis in the next few quarters," he said."Perhaps they can stave off the problem for a year, but something will have to be done about the banks."Without a banking crisis, "Italy would still be the political mess it has been for 65 years, but the banking mess turns the political mess into an economic mess," Maudlin wrote."There is a significant chance Italy will decide to leave the Eurozone and/or the European Union in the next year or so. Is it likely? No, but we've seen less likely things happen recently. Just the discussion of the possibility could be destabilizing to markets that already have enough worries."Eighteen percent of the total loans made by Italian banks are now considered to be nonperforming, Maudlin wrote. "Nonperforming loans occur everywhere, of course, but not to this level. "On an aggregated basis, the Italian banking system has less than 50 per cent of the capital it would require to cover the bad debts. Estimates are that Italian banks may need €40 billion just to remain solvent. The banking situation gets even worse, as we will see."Italy is problematic for many of the same reasons that Greece, Spain, and Portugal are. Bank customers in these southern-tier Eurozone states borrowed to buy goods from the wealthier north, mainly from Germany; and then the economic growth they anticipated failed to occur. "The purchased goods have mostly been consumed, so there is no collateral to recover. Many loans look like near-total losses."Writing off a massive loan as a loss will render the bank insolvent, so instead it goes into 'extend and pretend' mode, allowing endless payment delays on the flimsiest premises, hoping against hope that you will win the lottery and resume paying your loan. That's what is happening in Italy and indeed throughout Europe. It happened in the US during our housing crisis"To put the bad debt in context for US readers, banks would have to have nonperforming loans of US$3.8 trillion to be this badly off. That total would dwarf any problems from the 2008 subprime crisis." The world's oldest bank, Banca Monte dei Paschi di Siena, is one of Italy's largest and "possibly its most troubled," according to Maudlin. He said Monte dei Paschi was "trying to raise €5 billion in new capital with a three-part plan: convert subordinated bonds to equity, sell new equity via private placement to institutions, and promote a new public equity offering. "None of the three is going well. You know a bank is in trouble when its stock drops 84 per cent in less than a year and still no one sees a bargain," Maudlin wrote.Unicredit, which is even larger than Monte dei Paschi, intends to raise €13 billion early next year. "Prospects for success range from slim to none. Time is running out,