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Italy's Monte dei Paschi bank, the oldest surviving bank in the world.

In a statement following a cabinet meeting yesterday, the government said the move to rescue the troubled Monte dei Paschi may result in higher than-anticipated borrowing, to be financed by issuing government securities.

The funds could be used to rescue the institution as early as this week. Monte dei Paschi needs to raise €5bn in new capital by the end of the month. It is hoping for private sector investment, but the state will step in if none materialises within 10 days.

The bank is the worst performing in Europe, according to a European Central Bank stress test, but Italy’s entire banking system is struggling with €360bn worth of bad loans.

Under European Union rules designed to protect taxpayers from bailing out banks, Monte dei Paschi’s private investors would be the first to take losses. Many of those investors are Italian savers.

Analysts have therefore warned that this could trigger a significant political backlash, putting pressure on the Italy’s new prime minister Paolo Gentiloni. His government was only sworn in last week.

Gentiloni was appointed prime minister following the resignation of Matteo Renzi, who stepped down after losing a referendum on constitutional reform.

The plebiscite, seen as a major victory for Italy’s hard left and hard right, cast Italy’s economic future into doubt and has endangered the planned rescue of Monte dei Paschi.