The good news is that Italian banks, unlike Spanish ones, are in decent shape - they didn't have the same construction and real estate boom/bust as the Iberians did. Also, the Italians can manufacture stuff - especially luxury goods - and sell them the world over without a problem, in contradistinction to Greece for example. Also, Italy's deficit as a percentage of GDP is under the 3% allowable limit for the EZ and its new leader, Mario Monti, is strong, competent and highly respected inside his country and around the continent.
The bad news is that we're talking about one of the largest sovereign debt loads on the planet - $2 trillion or 120% debt to GDP. The country has to sell roughly $35 billion worth of bonds each month just to keep the lights on. Half of Italy's debt is owned by it's citizens, the other half needs foreign purchasers. And despite the relative strength of Italian banks, the money has begun to fly north, over the Alps to Switzerland.
The risk of contagion to and from Italy is now the number one issue credit markets are focused on, especially in the wake of Spain's admission that they cannot escape without hundred billion euros of assistance.