"You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before."

Rahm Emanuel prophetic words were quickly put to use by Italy on Monday morning, which barely waited one full day before using Brexit as the scapegoat excuse to warn that a €40 billion bailout of Italian banks is coming.

As a reminder, on Monday morning the local media reported that Renzi's government was pursuing a six-month waiver of EU state-aid rules,
allowing it to shore up banks without forcing investors to share losses. Two days ago, when we first reported of Italy's proposed bank rescue plan, we said that the chairman of Lower House’s Finance Commission, Maurizio Bernardo, confirmed that the government is studying options to support the banking sector, including a capital injection, and said a law decree “with measures going in that direction” could be approved by the end of this week.

We pointed out that how such an intervention would be implemented was unclear; it was is also unclear how such a direct state recapitalization of Italian banks using public funds would be permitted by current EU and ECB regulations, which prohibit state bailouts of insolvent banks, although Europe has a long and illustrious history of finding massive loopholes to that particular prohibition. "Last but not least it is unclear how existing stakeholders, shareholders, bondholders and uninsured depositors, would be impaired under such a bailout."

Well, they wouldn't, despite Europe's recent implementation of bail-in rules. That was the whole point.

However, while Italy was hoping it would get a "pass" on using public funding, mostly Eurozone generated and thus courtesy of Germany, this appears to have hit a dead end moments ago, when Bloomberg reported that Germany opposes any attempt to shield private bank investors from losses if Italy pushes ahead with plans to recapitalize lenders. Chancellor Angela Merkel’s government says that European Union rules on handling struggling banks should apply in any rescue effort, including forcing losses on shareholders and some creditors before public money can be injected, the person said, declining to be identified because the deliberations are private.

And just like that Renzi's entire recapitalization plan has gone up in smoke, because if there is one person in Europe who can veto an Italian bailout, it's Merkel, which is precisely what she has done.

As Bloomberg adds, any waiver of the rules would be complicated, as Germany insists that the EU’s Bank Recovery and Resolution Directive be applied. That will mean Italy must first avoid triggering a wind-down procedure. The assumption in BRRD is that the need for “extraordinary public financial support” for a bank indicates that a bank is “failing or is likely to fail, and therefore triggers the need for resolution,” according to the European Banking Authority.

Also according to the source, Germany isn’t pushing for banks to be wound down, according to the person. The government does, however, want to ensure that private investors are tapped before any public money is put into the banks. EU state-aid rules normally require shareholders and junior creditors to share losses.

That, as we noted on Monday, is a dead end: currently, it is practically impossible for Italian banks to raise capital. "They are caught in a pincer as the ECB simultaneously demands compliance with tougher capital adequacy buffers, in some case demanding fresh infusions of capital three or four times.  The banking squeeze has become politically explosive in Italy after thousands of small depositors were wiped out at four regional banks late last year. They were classified as junior bondholders, even though most of them were just ordinary savers who did not realize what was being done with their money."

But worst of all for Renzi, Merkel's government in Berlin rejects the argument that the U.K. vote to leave the EU constitutes an “exceptional circumstance” which, under EU basic law, can allow a national government to grant aid to a company outside of the state-aid rules.

Which simply means that Europe will need a bigger crisis, something which can be easily arranged, because recall as we concluded last time that the biggest winner from an Italian bank bailout would be none other than the ECB's Mario Draghi under whose tenure as governor at the Bank of Italy from 2005 until 2011 is when Italy's banks loaded up on all those €360 billion in bad and non-performing loans which Italy is now desperate to eliminate or at least offset. The last thing Draghi would want is for his legacy to one remember for the collapse of the Eurozone's most insolvent banking system.