European authorities could punish the Italian government for putting taxpayers' money into the recapitalization of the troubled lender Monte dei Paschi di Siena (BMPS), but such a decision would prolong the ongoing European crisis, an economist told CNBC on Wednesday.
"If Italy goes entirely by the European rules, it has to go ahead with a 'bail-in' before it provides government funds to recapitalize the banks," Marios Maratheftis, chief economist at Standard Chartered, told CNBC on Wednesday.
"And if you 'bail-in' bond investors in Italy, it would be quite different than bailing in bond investors anywhere else because a lot of the bond investors in Italy are retail investors, who also just happen to be the Italian voters," Maratheftis explained.
The oldest Italian bank needs to raise 5 billion euros ($5.4 billion) by the end of the month but investors are increasingly more reluctant to inject money into the bank after the defeat of Italian Prime Minister Matteo Renzi in Sunday's referendum.
Media reports on Tuesday suggested that the Italian government is preparing to step in. Reuters reported, citing anonymous sources, that it is planning to take a 2 billion euro controlling stake of BMPS using taxpayers' money – a move that could be considered illegal state aid under European rules.
Meanwhile, a spokesman for the Italian Treasury declined to comment on a separate report in La Stampa newspaper on Wednesday which said that Italy was set to ask for 15 million euros in aid from the European Stability Mechanism - a crisis resolution mechanism set up for euro area countries.
A "bail-in" is effectively rescuing a bank on the brink by making its creditors and depositors take a loss on their holdings. But opting for a state bailout for BMPS could not only raise problems with European competition authorities but it could also spark further anti-European sentiment among Italian voters.
Any punishment from Brussels on Italian authorities would also make Italian voters angry at a time when support for Eurosceptic movements is on the rise.
"It would be a complete disaster," Maratheftis said given the importance of Italy to the euro area and the European Union.
"It's a country that to some extent is self-sufficient; it's a country that has voted quite loudly in the latest referendum; it's a euro member, unlike Great Britain; it's part of Europe and it's at the core of Europe," he explained.
Italy was one of the founding members of the EU and it's the third largest economy in the euro area.
There are concerns that the current political instability in Italy, as Prime Minister Matteo Renzi prepares to hand in his resignation, could undermine the plans to recapitalize the banks and prevent economic growth as much-needed reforms stall.
"The main risk for 2017 is Italy," Maratheftis added.