Italian banks are on the brink of collapse. Will the Eurocrats bend the rules for Italy?

Italian bank are on the verge of collapse as losses from bad debts are mounting. The Italian banking sector currently holds about 360 billion euros worth of bad loans, which represents an astounding 17% of all loans in Italy, or about one-fifth of Italy's GDP.

Here's the really, really scary part: the toxic sludge of bad loans on the balance sheets of Italian banks is much higher today than during the 2008 financial crisis.

And this fact is already reflected in Italy's Bank Stock Index, which is now trading near it's 2012 lows:

Italy's largest bank, Banca Monte dei Paschi di Siena, has performed much worse than the index, losing a staggering 75% of its market capitalization. The Italian economy - like many other ones in the EU - has still not fully recovered from the collapse in 2008 and now Italian authorities are mulling another bank bailout, which the Eurocrats in Brussels are not very fond of.

German Chancellor, Angel Merkel, recently stated:

"We established specific rules as far as the winding down of banks, the recapitalization of banks is concerned. And we can't come up with new rules every two years."

According to EU "bail-in" rules, any bank in financial trouble must first apply haircuts to bondholders and creditors, before any taxpayers funds are tapped. However, the current situation in Italy is such that a majority of Italian junior bank bonds were not sold to big hedge funds and financial investors, but to small retail investors and households.

The Italian regulators are now claiming that these "small investors" can't afford to be wiped out financially and want to go against the EU bank recapitalization rules.

If the EU bureaucrats decide to force losses on these Italian investors, anti-EU sentiment across the region may flare up significantly, putting even more ammunition in the hands of the euro-skeptics, which were emboldened in the aftermath of Brexit.

Unless the pontificating politicos in Brussels want anti-EU sentiments to ratchet up another notch, the bank recapitalization rules are very likely to be "bent" for embattled Italian banks. What are the long term implications of setting such a precedent?

You tell me!

Images: express.co.uk, zerohedge.com, blogs.ie.edu,