We recently reduced our position in Eurozone equities, which brings our overall exposure to Europe further underweight. One area within European equities that we are quite concerned about is the bank sector. The Italian debt situation is at the heart of the matter as interest rate spreads between Italian and German bonds have been widening. The rising risk premium demanded by investors is one indication of concern regarding the scale of the new Italian governing coalition’s fiscal plans. The deteriorating value of Italian debt impairs bank balance sheets across the region and in turn pushes European bank share prices lower (depicted on the chart below). The interdependence of European banks and government debt has been problematic for some time and measures are being taken by regulators to address this relationship.