Italy, not Turkey, is the biggest threat to European banks, strategist says

Krisztian Bocsi | Bloomberg | Getty Images

The euro sign sculpture stands outside the former European Central Bank (ECB) headquarters in Frankfurt, Germany, on Sunday, July 3, 2016.

Investors are wary of rises in pensions and state benefits, given that Italy already has a significantly high public debt pile — the second largest in the euro zone, at about 130 percent of gross domestic product (GDP).

If market players do not approve of the next budget, due around October, then borrowing costs for Italy are likely to go up, which in turn could affect neighboring European countries. It could also create problems for certain European banks that hold Italian debt.

Kinmonth said that apart from the budget, there are other events that could spell trouble for European banks. Ratings agencies are due to update their opinions on Italy in the coming weeks; the Italian banks still hold a high level of non-performing loans; and the uncertainty surrounding politics in Rome are making it increasingly difficult to predict what might happen to banks as a result.

In the aftermath of the 2011 sovereign debt crisis, investors have become suspicious of contagion risks across the euro zone.

“The Turkey issue is something on the radar, but it is far more idiosyncratic at a bank level and all eyes will be on Italy,” Kinmonth said.