The original plan to fix Italian banks by using private investor cash could never work, according to one analyst.
The window has officially closed for private investors to take part in any bailout of Banca Monte dei Paschi di Siena (BMPS) and after the bank admitted a lack of interest, the Italian government looks set to step in.
Eric Lonergan, Fund Manager at M&G, said Thursday that the most efficient way of fixing the problem is by using the borrowing clout of government.
"There is a very simple solution to the Italian banking problem. The Italian government can borrow at zero real, comes out and buys 50 percent of the non-performing loans and recovers the value over 20 years.
"The notion that you are selling non-performing loans to the private sector, people like me who want a 20 or 30 percent rate of return, is completely inefficient," he said.
Lonergan said the BMPS affair marked the first test of Europe's method of dealing with troubled banks and he considered the verdict "pretty damning".
Small and mid-sized firms have been pulling deposits from BMPS as investors fret over losses that could be imposed on bondholders as part of a state rescue.
CNBC has learned that the BMPS board will meet Thursday afternoon and then officially ask the Italian government for extraordinary support.
Italy's parliament is ready for the request after it approved a 20 billion euro ($20.8 billion) aid package for its troubled lenders on Wednesday.
Further, a cabinet meeting this evening in Rome is expected to agree a decree guaranteeing loans and bonds related to BMPS in a bid to diffuse the liquidity tension.