Clock ticking on Banca Monte dei Paschi on reports it has failed to find private backers

Shares of world's oldest bank slammed on liquidity warning

Time is running out for the third biggest Italian lender after it warned Wednesday that it would run out of cash at a faster pace than previously forecast, if there wasn't fresh money coming in quickly.

Monte dei Paschi had previously said that its 10.6 billion euro ($11.5 billion) liquidity position could last for 11 months. However, it said Wednesday that this would happen in four months' time.

The oldest bank in the world has been struggling for a long time, but its situation has deteriorated since political instability increased in Italy at the start of December. Shares were suspended on Wednesday afternoon after falling more than 10 percent.

The bank has been looking to raise capital in three ways: debt-to-equity swap, stock offering and disposal of soured loans.

Alessia Pierdomenico|Bloomberg|Getty Images

On Tuesday, the bank raised 500 million euros in a voluntary debt-to-equity offer however Monte dei Paschi remains far from achieving its aim of gathering 5 billion euros. The troubled Italian lender has been unable to secure an anchor investor which is willing to put money in its privately funded rescue plan, according to a Reuters report which cited sources. CNBC has been unable to verify these sources.

Italy's third-largest bank had hoped a Qatari sovereign wealth fund would commit 1 billion euros to its cash call however this appeared to have fallen through on Wednesday afternoon, the report added. The knock-on effect of being unable to attract an anchor investor seems to have resulted in dwindling interest from the wider investment community with less than 24 hours before the offer ends.

With unexpected changes in the Italian government, investors became more reluctant to contribute to the planned recapitalization process.

As such, state intervention is increasingly more likely. The Italian economy minister, Pier Carlos Padoan, said Wednesday that retail investors will feel little or no pain at all from a potential state intervention.

Troubled waters ahead for BMPS

The Italian lower house of parliament approved on Wednesday the government's intention to borrow up to 20 billion euros ($20.8 billion) to support the country's weak banking system.

"There will be a compromise. It will probably drive a coach and horses through the bank reconstruction protocol which the EU (European Union) has in place but that's going to be the political reality of this. The bank of Monte dei Paschi di Siena will be rescued by the Italian state and there will be some sort of form of words which allows everyone to save face in Brussels," Richard Lewis, head of global equities at Fidelity, told CNBC on Wednesday.

However, state intervention could also spur further anti-euro sentiment among Italian voters at a critical time in Italian politics. The country is currently being governed by an interim team and snap elections are expected to be called at some point in 2017.

International authorities have repeatedly asked the Italian authorities to deal with the large level of non-performing loans in its banking system since the financial crisis.

There are concerns that the current issues affecting Monte dei Paschi could destabilize the wider Italian banking system.

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