Italy yesterday (Thursday) became the third European country in two days to offer funds to at-risk banks in a bid to restore investor confidence, promote market stability and save its economy from a prolonged recession.In following Great Britain and Spain, Italy’s government “will take all measures necessary to stabilize the financial system and to protect savings,” Finance Minister Giulio Tremonti said in a statement.

“We will do what it takes,” he said. “That’s why we didn’t give any numbers for the amount of possible interventions.”

Italian newspaper Il Sole-24 Ore said on its Website that the size of the fund is $27 billion (20 billion euros), Bloomberg News reported.

However, Tremonti was quick to add that he doesn’t believe the government will actually have to tap the fund at any time, but rather is preparing for the worst.

“We don’t think we’ll have to apply this law. We don’t think there are any Italian banks that need to be saved,” said Tremonti. “We did this because we needed to; all European Union members agreed they needed to be ready to deal with the situation.”

No Italian bank has yet asked for a government bailout, which supports Tremonti’s assertion that this action is more of a precautionary measure. But Italy’s benchmark SP/MIB stock index has still lost 35% this year, essentially equaling the decline of even the beleaguered Dow Jones Industrial Average, which dropped 7.33% yesterday.

Italy’s two largest banks, UniCredit SpA and Intesa Sanpaolo SpA, and insurer Assicurazioni Generali SpA account for more than 35% of the index, and all three have had their valuations trampled by the global credit crisis. The Italian government hopes that by guaranteeing the security of the country’s biggest lenders, it will be able to reverse the market’s course.

“Italian banks did not sign up to any ‘toxic products’ and had only this problem, which has now been resolved,” said Italian Prime minister Silvio Berlusconi. “We advise Italians not to sell their shares but hold onto them, because in 18-24 months the share price will be back at the right level.”

Of course the nation’s stock market isn’t the only thing Italy’s policymakers have to worry about. That nation’s economy, as measured by gross domestic product (GDP), actually contracted 0.3% in the second quarter, and it’s likely the nation is already in the midst of a recession. In its latest World Economic Outlook, the International Monetary Fund (IMF) forecast that Italy’s gross domestic product would decline by 0.1% this year and 0.2% in 2009.

If Italy has lapsed into a recession, it is the European nation’s third since the end of World War II. The first of the other two was in 1975, during the oil crisis, and the second was in 1993, during a public finance crisis.

In its report, the IMF said that the only Eurozone economy doing worse than Italy’s is that of Ireland. The IMF says Ireland’s economy will shrink 1.8% this year and 0.6% in 2009.

Italy Shores Up Banking Sector as Recession Looms