An Italian exit from the EU 'could require the biggest bank recapitalization ever,' investment chief warns

Italy withdrawing from both the European Union (EU) and the single currency would be extremely painful for the world's banking system, an investment chief told CNBC on Friday.

Italy's coalition government is poised to present its 2019 budget next month, setting out its economic and financial plans for the coming year.

The event is likely to be closely monitored by investors, with many concerned Italy's euroskeptic leaders will stick to contentious spending plans — and exacerbate the country's growing budget deficit and massive debt pile.

"An Italian exit from the EU and an Italian exit from the euro would be a very, very painful event for the European and therefore world banking system. It could require the biggest bank recapitalization ever — bigger than the U.S. in 2008," Jim McCaughan, CEO of Principal Global Investors, told CNBC's Steve Sedgwick at the Ambrosetti Forum in Italy on Friday.

"(But) with public opinion in Italy remaining pro-EU, so long as that stays, I think they are not going to get into that kind of tension," he added.

Recapitalization refers to a company restructuring its debt and equity mixture to make its capital structure more stable. During times of financial crisis, such as in 2008, governments can also intervene when the solvency of banks and the broader economic system come into question.

Michele Spatari | NurPhoto | Getty Images
Members of a political party hold an Italian flag in Rome, Italy.

The unveiling of Italy's economic policies and growth projections for 2019 is likely to be a key moment for the populist government, made up of the right-wing Lega party and left-leaning Five Star Movement.

That's because Italy is the euro zone's third-largest economy and the prospect of an economic collapse in Rome could damage the entire region's financial and political stability.

Ahead of Italy's final budget for 2019, some Italian lawmakers have called for the preparation of a so-called "Plan B" — referring to preparations for Italy's exit from the euro.

— CNBC's Holly Ellyatt contributed to this report.

Click to show more