The week before Christmas – Italy’s Prime Minister Paolo Gentiloni said his government had authorised a €20bn fund to support Italy’s turmoiled banking sector.The move came after Monte dei Paschi failed to raise the €5bn need from private investors to stay afloat.The Italian bank said it would request a capital injection from the state to keep itself in business

Under new EU rules on bank bailouts, the bailout will entail a forced conversion of the bank’s junior bonds – many of which are held by small investors – into shares. Trading in MPS’s financial securities was suspended after Italy’s third-largest lender confirmed it would request “temporary financial support” from the government.

The Cabinet led by its prime minister Paolo Gentiloni backed a decree that will essentially allow MPS to benefit from liquidity guarantees and a capital injection.

“This will secure the capital needs of MPS and allow the bank to pursue its industrial plan,” Pier Carlo Padoan, the finance minister, said in a brief press conference early on Friday.It went to say that “Italy’s third-largest bank will finally return with force to operate in support of the Italian economy and in a context of full tranquillity for its savers and its employees.”

The Italian parliament had already authorised the government to create a fund to prop up the banking sector.

One senior banking analyst from Goldman Sachs in London said the the bank, which has been in a desperate state after years of losses and loans that may never be repaid, could not be seen to go bust as this would inevitably have triggered further failures in Italy, and could of potentially started a new European banking crisis.

He went to add that the major issue is the possible loss for ordinary savers he went on . New EU rules designed to protect taxpayers have insisted that banking investors will bear some of the costs of rescuing troubled lenders and those who stand to lose as a result will include tens of thousands of ordinary savers.

The government says categorically they will be compensated.The Italian Government said that they would move to compensate some of the 40,000 MPS retail bondholders who might take a hit, though institutional investors would not be spared. On Friday, the Italian government announced that the reimbursement scheme would allow junior bondholders to receive senior debt of the same value as their subordinated bonds.

One of the major issues with with Italy’s banking rescue is that it will worsen the country’s fiscal outlook at a time when it already has one of the highest ratios of debt to gross domestic product in Europe however the Government have insisted that the rescue would be a “one-time” effort that was temporary and therefore would not impact the structural balance, which is one of the key fiscal measures used by the EU.