On Sunday, when we previewed the latest last-ditch effort to rescue Italy's third largest bank when Monte Paschi launched a 4-day attempt to sell €5 billion in equity to anchor and retail investors, we said that "in the otherwise quiet pre-Christmas week, all eyes will be on Monte Paschi, and specifically the intentions of the alleged anchor investor, Qatar (and perhaps a handful of Chinese banks), to determine if Italy's banking crisis is "fixed" if only for the near future, or if the new year is set to begin with another "risk flaring" episode out of the Italian banking sector as Monte Paschi's bailout once again morphs into a political scandal and the biggest headache for Italy's brand new government."

This was followed on Monday by a surprising report out of Reuters that the Italian cabinet was seeking parliamentary approval to raise public debt by €20 billion, in a "precautionary" move, which however set off alarms that the Monte Paschi private sector bailout was not going as expected, and the government would have to step in, in the process triggering Germany's ire.

That was confirmed this morning when Bloomberg reported that Monte Paschi will "probably fail in its effort to raise €5b of funds from money managers and individuals as potential anchor investors balk and few bondholders agree to swap their notes into stock, said people with knowledge of the matter."

The much discussed Qatar sovereign-wealth fund, which had considered an investment, hasn’t yet committed to buying Paschi shares Bloomberg notes, and no major investors have stepped in in its place.

Just as bad, a concurrent second debt-for-equity swap has raised less than €200m through Monday, far less than the expected target in the billions, and confirming that the state's bailout contribution could be substantial.

The above means that, absent some dramatic change in the opinion in private sector investors over the next 48 hours, Monte Paschi's market-based rescue is doomed, and the state will inevitably have to intervene. As a reminder, under European banking rules, any losses must be imposed on bondholders if taxpayer money is used. The state is discussing a so-called precautionary recapitalization that would potentially limit bondholder losses.

As a further reminder, on Sunday Germany once again voiced its reservations against a state bailout in a "worst case" scenario when Merkel aide Christoph Schmidt warned again against a taxpayer rescue of Monte Paschi. "The restructuring of the bank should be achieved under the agreed rules, meaning the creditors must contribute to its rescue, not the taxpayers,” Schmidt, head of German Chancellor’s council of independent economic advisers, said in abstract of interview to be published Monday by Westdeutsche Allgemeine Zeitung.

Schmidt said that Italy’s effort to solve its banking crisis is key test for European banking union, and added that Italy must push for necessary reforms, warning that a lack of reforms in Italy could pose threat to euro area.

And so, with just days to go until the New Year, the epicenter of Europe's festing banking crisis - Italy - is about to test the resolve of Europe's political class, with the first truly substantial bank bailout in years, which in turn will answer the persistent question: will Europe finally engage in bail-ins, or will the poliical will be too low, and revert to the old, familiar taxpayer, and public-debt, funded bailouts.