Europe’s financial woes are far from over, as Italy spirals toward a banking disaster. While it has become something of a standing joke that Italy’s banks are in terrible shape – the entire sector has essentially been stagnant for many years –  things are going from bad to worse. Attempts have been made to prop up the banking sector, but encumbered by nearly $400 billion of souring loans, and a public debt at close to 140% of GDP, the only option available in order to stave off collapse is a significant capital injection from Europe, but thanks to unique investment rules in Italy, that is all but impossible.

The Eurozone has strict rules about offering bailouts to banks. One of these, involves bondholders losing value on their investment in the bank, before any capital is made available. In other words, the taxpayers are buffered to some extent from simply footing the bill by sharing the losses with investors. In most countries, this means that large institutional investors have to lose a certain amount of percentage points across the portfolio, or that hedge funds and syndicated entities are impacted in a minor way, as bank bonds usually form the basis of a hedge against riskier investments.

However, in Italy, thanks to differing investment regulation, nearly $250 billion worth of bank bonds are held by retail investors. This means that in the event of a banking bailout, the people who would suffer first would be regular citizens. In case there was any confusion as to the impact of this, when a small bailout occurred in Italy last year, one bondholder committed suicide, wiped out by the “bail in,” rule.

Italian Prime Minister, Matteo Renzi, is asking the EU to apply common sense and allow retail investors to be exempt from taking losses in the event of the bailout. He’s selling this in an intelligent way – that mathematically some form of cash injection in a requirement, and Italy needs an increase in confidence in the financial system as a whole in order to make the sector sustainable for generations. He argues that this confidence would be personified by a joint Europe uniting behind Italy. However, Angela Merkel is determined to ensure that the EU’s ongoing habit of bending rules in order to save certain countries, or sectors comes to an end. Responding to Mr Renzi’s appeals she said, “We wrote the rules for the credit system and we cannot change them every two years.”

With Europe’s fourth biggest economy on the brink, and local provisions that cover under half of the bailout amount, it seems that an Italian collapse is all but guaranteed. But even if – as will likely happen – the EU decides to put together a bailout solution that doesn’t appear to be a bailout, the questions around the  sustainability of certain  sectors in the long run must be brought to the fore. The long-term confidence of Europe, and the world, is too important to continue band-aid repairs.