Italy's prime minister, Matteo Renzi, vowed last month to veto any attempt to cap holdings, putting him at odds with Germany. Italian government securities account for 10.4 percent of the country's bank assets, the most among major European economies and compared with 3.2 percent in Germany, the latest European Central Bank figures show.

A limit would mean "altering the balance of the Italian banking system," said Francesco Boccia, a lawmaker from Renzi's Democratic Party who heads the budget committee in Italy's lower house of parliament. "Banks are already struggling to lend money to small- and medium-sized companies," he said. "This would be the final blow."

In essence, the euro region's biggest debtor is on a collision course with its biggest paymaster over how to fix the failures of the past.

'Doom Loop'

Having financial institutions willing to finance the government is vital to most countries, but especially in Italy.