The European Central Bank will not give extra time to the embattled Italian bank Monte dei Paschi to raise money to finance its operations, sources told CNBC.
Monte dei Pashi requested Thursday more time to move ahead with a 5 billion euro ($5.4 billion) recapitalization process which was due to be concluded this month. It claimed that the ongoing political crisis in Italy would not allow a final deal with investors to be concluded before a new government is in place.
However, the ECB believed it had given enough time to Monte dei Paschi to deal with its bad debts. They had been working on the bank's financial stability since 2014 when the bank failed the ECB's stress test for the first time. Monte dei Paschi failed the same tests a second time earlier this year.
The ECB declined to comment.
Shares of Monte dei Paschi, which were slightly higher this morning, fell more than 7 percent following news first reported by Reuters.
The rejection increases the pressure on the Italian lender and politicians. Italy may have to opt for a state bailout to control contagion concerns, which could raise problems with European competition authorities.
If Italy opts for injecting taxpayers' money, the European Commission – which oversees competition rules – could fine Italy for illegal state aid.
Apart from rising problems with Europe, a state bailout could spur anti-establishment and anti-European sentiment among Italian voters at a time when support for Eurosceptic movements is on the rise.
Credit Ratings agency Fitch said in a note on Tuesday that the referendum result could also damage plans for recapitalization of other Italian banks, including UniCredit.
That would "have negative implications for the broader banking sector, whose attractiveness with investors has already reduced significantly during 2016. The sector's ability to access the institutional markets for funding and capital, which has become more difficult and expensive this year, could deteriorate further," Fitch warned.