The spread between yields on Italian and German bonds climbed to almost five years on Friday, as a dispute between Rome and Brussels over the country's budget threatens.
EU authorities rejected the budget proposals submitted by Italy earlier this week on Thursday, accusing the euro area's third largest economy of an "unprecedented" breach of EU spending and deficit rules.
Citing Italy's plans to increase spending and deficit and keep public debt high, the European Commission said the country is trying to "commit a particularly serious" rule-breaking offense.
"These three factors seem to indicate a particularly grave non-compliance with the budgetary commitments set out in the Stability and Growth Pact," said a letter to Italian Finance Minister Giovanni Tria, which appeared on Thursday.
"With Italian sovereign debt at around 1
The accusation has exacerbated tensions between the two parties, with a confrontation becoming more likely. This potential result has shocked investors and pushed the spread between Italian and German 10-year bonds to the highest level since 2013 at the end of the Eurozone debt crisis.
On Friday morning this spread was 3.4 percentage points, an increase of almost 50% from the end of September.
The following chart shows the extent of the recent rise in spread:
German public debt is widely considered one of the safest ways of investing the planet, thanks to the firm commitment country to run a budget surplus. Italy, on the other hand, seems to be less stable and bond yields are rising.
Against the background of the budget, it is proposed to increase both Italy's total debt and its deficit in the short term and raise the deficit to 2.4% of GDP in the coming years. This means that Italy will miss a predetermined maximum deficit of 0.8% of GDP.
Italy was requested to change its budget before being submitted by the euro area authorities, and was informed that the proposals constituted a "significant departure" from its mandate. It has refused to do so and the Italian Parliament approved the proposals on Monday evening.
Matteo Salvini, leader of the Lega Nord, one of the two coalition partners of the Italian government, has made it clear that the government plans to push ahead with the implementation of its budget proposals, regardless of the opposition from Brussels.
"If Brussels says I can not do it, I do not care, I'll do it anyway," Salvini said last week, referring to the implementation of the budget.
Italy has to reply to the results of the commission by Monday.