FORTUNE – Over the weekend, Italy's president tapped Mario Monti to lead the country out of Europe's sovereign debt crisis. The new leader, who replaces Silvio Berlusconi, one of Italy's longest-serving prime ministers, now faces the arduous task of defending the country from financial collapse and a crisis that seems to get worse every week.
Last week, following political uncertainty and calls for Italy to control its soaring $2.6 trillion debt, yields on Italian bonds soared to levels that previously sent other euro zone nations scrambling for financial help. This marked a scary new development in Europe's ongoing crisis. Italy is plagued by massive debts and slow growth. Its economic weight makes its problems quite threatening to the world's financial system. And as the euro zone's third-largest economy, it's said to be too big to bail out.
Needless to say, investors have every reason to fret. But they also have reason to hope that Italy is well-equipped to dig out of its financial hole. Its economy is not nearly as dire as Greece or other bailed-out euro zone nations. Italy's public finances might be a mess, but its private sector is relatively strong -- something investors may be overlooking. Admittedly, as The Wall Street Journal pointed out, its private sector is made up of mostly small mom-and-pop shops that seem unable to grow. However, Italy is known to be a nation of savers. So unlike its government, Italy's households and many private businesses have relatively low debt.
At the end of 2010, financial debt of households and non-financial firms amounted to 126% of GDP, compared with 168% in the euro area, 166% in the United States, and more than 200% in the United Kingdom, writes Juan Carlos Martinez Oliva, visiting fellow at the Peterson Institute for International Economics. Also, Italy is fundamentally a far richer country than any of the other peripheral countries – Northern Italy is among the richest regions in Europe. And net debts owed to investors abroad is equal to only 24% of GDP, which Martinez Oliva notes is higher than the euro area's average of 13% but still well below levels for the troubled peripheral economies of Portugal at 107%, Greece at 96%, Ireland at 91% and Spain at 89%.
The challenge now for Italy's new government is to preserve the country's wealth. Though there haven't been any signs of bank runs, the risk is that a bigger economic panic could scare Italians into putting their money elsewhere.
"If Italians trust their government enough to prevent it from financially collapsing, there should be ample domestic wealth to do so," writes Jacob Funk Kirkegaard, research fellow with Peterson.
Over the weekend, the Italian Parliament approved austerity measures sought by the European Union to cut spending and stimulate growth. They include everything from selling assets and privatizing municipal services to raising the retirement age by 2026 and offering tax breaks to companies that hire young workers.
As Italy's new government plots its next steps, Kirkegaard says officials could tap parts of its citizens' wealth to buy up sovereign debt. But this will depend largely on whether Italy's new leader can convince them to accept short-term financial sacrifices – a possibility, he notes, given that most well-to-do Italians are getting older and will increasingly turn to government-run health care services.
It remains to be seen if any of Italy's reforms will steer it down the right financial path, but if it does, it wouldn't be the first bailed out euro zone nation to convince investors that brighter days just might be ahead.
It's not quite a rosy picture yet, but take a look at Ireland. The Celtic Tiger had relatively strong economic fundamentals before a banking crisis forced it seek a bailout last year. Since then, yields on Irish bonds have fallen nearly half after two quarters of better-than expected export growth. Indeed, similar to Ireland, much of Italy's economic future depends how the crisis might spread and impact the euro zone. And it doesn't help that the European Union last week warned that the euro zone could fall into a "deep and prolonged recession."
For now, it's worth noting that Italy's new government has a few things to work with as it tries to make things right.
China is one of the few countries with strong growth, it holds massive amounts of cash, and its largest export market is Europe. So why isn't it stepping up to help bail it out?
FORTUNE -- It was around this time last year when Europe's ongoing debt crisis unexpectedly drew the investment savvy of China. Officials from the world's second-largest economy swooped in, promising to back debt-troubled Spain by signing $7.3 MORENin-Hai Tseng, Writer - Nov 10, 2011 1:55 PM ET
With all the troubles developing around parts of debt-ridden Europe, could it possibly get worse? Some are actually thinking the unthinkable: A breakup of the 17-member euro zone.
The European Union just celebrated its seventeenth birthday, and it's clearly hit its awkward phase. Though the value of the euro has strengthened some against the US dollar in recent weeks, it has undergone a very bumpy ride on signs that Europe's sovereign-debt MORENin-Hai Tseng, Writer - Jan 26, 2011 1:39 PM ET
How dire is Europe's debt problem?
It is so ugly that Portugal drew polite applause Wednesday for completing the euro zone's first sale of government debt in the New Year – even though it had to pay six times the going rate at this time last year.
Adding to the heady atmosphere of a stayed trip to the guillotine, the euro dropped against the dollar, though not too much. And stocks in MOREColin Barr - Jan 5, 2011 9:47 AM ET
Germany is changing its tune, but you can barely hear it above all the creaking and wheezing in the euro zone.
German finance minister Wolfgang Schauble this weekend ruled out ejecting a faltering country from the European common currency. He said the consequences would be "unforeseeable" and potentially as disruptive as the 2008 demise of Lehman Brothers.
That's a welcome sign someone in Germany is coming to grips with reality. German leaders have spent recent months criticizing the MOREColin Barr - Dec 13, 2010 6:36 AM ET
|Chrysler relents, agrees to recall 2.7 million Jeeps|
|Perils of moving to a no-tax state|
|Google files First Amendment court case against NSA surveillance secrecy|
|Yahoo: 13,000 government requests for data|
|Stocks rally as Fed looms large|