Last week, following political uncertainty and calls for Italy to control its soaring $2.6 trillion debt, yields on Italian bonds soared to levels that previously sent other euro zone nations scrambling for financial help. This marked a scary new development in Europe’s ongoing crisis. Italy is plagued by massive debts and slow growth. Its economic weight makes its problems quite threatening to the world’s financial system. And as the euro zone’s third-largest economy, it’s said to be too big to bail out.

Needless to say, investors have every reason to fret. But they also have reason to hope that Italy is well-equipped to dig out of its financial hole. Its economy is not nearly as dire as Greece or other bailed-out euro zone nations. Italy’s public finances might be a mess, but its private sector is relatively strong — something investors may be overlooking. Admittedly, as
The Wall Street Journal
 pointed out, its private sector is made up of mostly small mom-and-pop shops that seem unable to grow. However, Italy is known to be a nation of savers. So unlike its government, Italy’s households and many private businesses have relatively low debt.

At the end of 2010, financial debt of households and non-financial firms amounted to 126% of GDP, compared with 168% in the euro area, 166% in the United States, and more than 200% in the United Kingdom, writes Juan Carlos Martinez Oliva, visiting fellow at the Peterson Institute for International Economics. Also, Italy is fundamentally a far richer country than any of the other peripheral countries – Northern Italy is among the richest regions in Europe. And net debts owed to investors abroad is equal to only 24% of GDP, which Martinez Oliva notes is higher than the euro area’s average of 13% but still well below levels for the troubled peripheral economies of Portugal at 107%, Greece at 96%, Ireland at 91% and Spain at 89%.

The challenge now for Italy’s new government is to preserve the country’s wealth. Though there haven’t been any signs of bank runs, the risk is that a bigger economic panic could scare Italians into putting their money elsewhere.

“If Italians trust their government enough to prevent it from financially collapsing, there should be ample domestic wealth to do so,” writes Jacob Funk Kirkegaard, research fellow with Peterson.

Over the weekend, the Italian Parliament approved austerity measures sought by the European Union to cut spending and stimulate growth. They include everything from selling assets and privatizing municipal services to raising the retirement age by 2026 and offering tax breaks to companies that hire young workers.

As Italy’s new government plots its next steps, Kirkegaard says officials could tap parts of its citizens’ wealth to buy up sovereign debt. But this will depend largely on whether Italy’s new leader can convince them to accept short-term financial sacrifices – a possibility, he notes, given that most well-to-do Italians are getting older and will increasingly turn to government-run health care services.

It remains to be seen if any of Italy’s reforms will steer it down the right financial path, but if it does, it wouldn’t be the first bailed out euro zone nation to convince investors that brighter days just might be ahead.

It’s not quite a rosy picture yet, but take a look at Ireland. The Celtic Tiger had relatively strong economic fundamentals before a banking crisis forced it seek a bailout last year. Since then, yields on Irish bonds have fallen nearly half after two quarters of better-than expected export growth. Indeed, similar to Ireland, much of Italy’s economic future depends how the crisis might spread and impact the euro zone. And it doesn’t help that the European Union last week warned that the euro zone could fall into a “deep and prolonged recession.”

For now, it’s worth noting that Italy’s new government has a few things to work with as it tries to make things right.