Sunday 17 July 2016 6:42 pm

Italian banks now likely to get hybrid solution, as EU rules still stand in the way of original plan

Italy's embattled banks are likely to benefit from a hybrid solution rather than a full-blown government bailout, it has been suggested.

It was widely understood the Italian government had been in discussion with the EU regarding plans to inject €40bn (£33.5bn) into the country's banking industry, which is currently struggling with hundred of billions of euros of bad loans.

However, such a move would involve going around EU rules which have been passed since the 2008 crisis.

In a regular Sunday note, economists at Italian banking giant UniCredit revealed that conversations its representatives had been involved in now made it believe that such a deal was doubtful.

The gist of the EU's banking laws is to make sure the taxpayer does not pay the price for failing banks while private investors get away unscathed.

One solution mooted by the note was for Italy's Atlante Fund – a private equity pool established for the purpose of recapitalising the country's bank – could be used to repurchase non-performing loans. However, it is questionable whether the level of funding is such that it will be able to solve the problem.

Additionally, the UniCredit note added that any action which is taken to prop up the ailing industry is now much more likely to be aimed towards specific issues, such as helping out large lender Monte dei Paschi di Siena.

However, as much of Monte dei Paschi's debt is held by retail investors, there may be cause for government to step in to help cover some of the losses, possibly by way of a compensation programme.

Italy's struggling banking sector is likely to find itself front and centre when European bank stress test results are released on 29 July.

It has also been speculated that banking giant JP Morgan has been brought in to help design a fund to help buy back bad loans. However, JP Morgan declined to comment on the rumours.