Congratulations SG!!!!! Scarlet fever though, oh joy...
It is a liquidity crisis in the sense that Italian banks have been struggling to raise funds on the interbank market since June at least, and it's getting worse. So I would say a bank credit crunch is already under way, and it's been made worse by the deteriorating government situation, and some more technical changes that took place in the bond clearing institution at the weekend.
Unlike Greece though:
- Italy is not actually insolvent, it's largely experiencing a temporary crisis. Greece was technically in default a while ago;
- Italy has a more developed and differentiated economy than Greece or Spain. If on one side that means that the recovery may be easier, it also means that the risk is much higehr: if we defaulted, the effect of that would be worldwide (and Mr Obama knows it very well - it's not surprising he commented on our position last night) and could break the euro.
- Italian govt has got £££ of assets to sell: ALitalia, trenitalia, Water, POmpei. Take your pick.
The fact that personal debt is low adds a "cushion effect", i.e. if taxes had to rise to curb the deficit, then Italian people would have money to rely on to see them though the crisis. But unless you are planning to hand over the money to the government, it does not really affect directly the public position.