Brexit and the Derivatives Time Bomb
...But Brexit changes everything, says Summers. Until now, the EU has been able to reject debt forgiveness as an alternative, using the threat of financial Armageddon if the debtor country left the EU. But the UK has voted to leave, and Armageddon hasn't hit. Other Eurozone nations can now threaten to do the same if they don't get debt forgiveness or a restructuring.
The First Domino -- Italy
That has evidently started happening, with Italy as the first challenger of EU rules. On June 27th, Ambrose Evans-Pritchard reported in the UK Telegraph that the first serious casualty of the Brexit contagion had struck. The Italian government is preparing a €40 billion rescue of its financial system, as Italian bank shares collapse. The government is now studying a direct state recapitalization of Italian banks, to be funded by a special bond issue. They also want a moratorium of the bail-in rules and bondholder write-downs, although those steps are prohibited under EU laws.
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