RELATIONS between Germany and Italy are set to hit breaking point, if Berlin's steps in to rescue Deutsche Bank, after blocking Rome from doing the same earlier this year.
Italy and Germany could fall out over banking bailouts
Angela Merkel's government has been put in a supremely awkward position by the crisis playing out at Germany's biggest lender, which some experts say will not go away without a state bailout.
And Italian prime minister Matteo Renzi is no doubt paying very close attentions as events unfold.
The leader has reportedly begged Germany to let him loan cash to Italy's banks, as investors have increasingly lost confidence in the institutions, which are saddled with billions of pounds worth of bad loans.
In particular, Italy's oldest bank Monte Dei Pasche has looked close to collapse several times this year, and Mr Renzi is still trying to secure a £4.2billion (€5bn) cash injection from investors for the lender.
But it's thought Berlin has so far been unyielding and told Mr Renzi that he must abide by new EU rules, which mean savers and small investors must take a hit before governments are allowed to use taxpayer money for capitalisation.
Such a move would have been akin to political suicide for the Italian prime minister.
Now Germany is faced with its own banking crisis, as investors flee Deutsche Bank amid concerns it can't afford a looming fine from US authorities.
Berlin also made a huge faux pas when it fanned the flames of the fire with claims that it would not provide state assistance.
The comments saw the bank's share price fall to new record lows last week and put the lender in an even more fragile position.
The situation is particularly embarrassing for the German government, which has long lectured other eurozone countries over how to deal with financial crises.
Renzi and Merkel are at odds over banking rescues
Despite the bravado, experts say there is no way Mrs Merkel can let Deutsche Bank go to the wall, because of its size and exposure, the lender could take down the entire eurozone banking system if it were allowed to fail.
It's thought Mr Renzi is now hoping that Germany will bailout Deutsche so that he can do the same for Italy's banks, which are still in an extremely vulnerable position.
As Deutsche's share price plunged last Friday, the Italian leader pointedly told reporters: "I am sure the German authorities will do whatever is necessary to avoid the worsening of the Deutsche Bank crisis.
"We have always said that the European Union has to do everything in its power to fix the problems of the banking sector and the main worry focuses on the German lenders."
However, experts said Berlin could use technicalities to step in and rescue Deutsche while still blocking Rome from helping Monte Dei Paschi.
Michael Hewson, chief market analyst at CMC Markets UK, said: "It would certainly help Renzi if the German government were forced to bailout Deutsche Bank, as it would then open the way for him to bail out Italy’s lenders, so I think there is a certain amount of hope on the part of Renzi that the German government may well act on that.
"The difference between Deutsche Bank and Monte Dei Paschi is apples and oranges though. Deutsche is a systemically important bank and state aid could be justified on that basis under the treaties in certain circumstances. Monte Dei Paschi is not and therefore would not qualify for state aid."
Such a move by Ms Merkel would be hugely damaging for relations between the two countries and could fuel anti-Europe sentiment in Italy.
Simon Tilford of the Centre for European Reform, a London-based think tank, said: "The big fault line in the eurozone is between Italy and Germany."
http://www.express.co.uk/finance/city/717542/Italy-and-Germany-s-SHOWDOWN-Deutsche-Bank-rescue
