After posting strong gains in early trading, the rally in Italian stocks has faded sharply, with the FTSEMIB index now down 0.6% after rallying 1.8% earlier and Italian bonds tumbled to session lows after Italy’s proposal for a 2.4% budget deficit saw a frosty reception at the European finance ministers gathering in Luxembourg.

Italy’s embattled finance minister, whose proposal for a 1.6% deficit was overruled by the ruling coalition last week, Giovanni Tria was greeted with little enthusiasm from his counterparts; France’s Bruno Le Maire said that the European Union’s budget restrictions must be respected by everyone while European Commissioner for Economic and Financial Affairs Pierre Moscovici said that Italy’s budget amounts to a “very, very significant” deviation from its previous projections and almost certainly violated the rules.

The last statement echoed an earlier report in the Italian press according to which Europe was set to reject the Italian deficit proposal, throwing the budget process in limbo, and potentially leading to another debt – and/or political – crisis.

Perhaps in response to the latest snub, Bloomberg reported that Tria would will cut short his attendance at the Eurogroup to return to Rome Monday night to finalize the government’s budget outline for 2019 which has so far only released the deficit target. “I will try to explain what is happening and how the budget plan was formulated,” Tria said on his way into the meeting. Fellow ministers can stay “calm” about Italy’s budget as the government is committed to reducing its debt burden in 2019, he added.

After Moscovici’s statement hit the wires, selling resumed in Italian bonds with the curve flattening led by front-end losses as risk aversion picks up with FTSE MIB paring gains. BTP futures broke earlier lows at 122.80 on a sharp pick up in volumes with 3% of daily volumes trading on the decline. 5y yields broke above Friday’s high at 2.40%, followed by 2y yield above 1.24%, while the yield on 10-year notes rose 11 basis points to 3.26 percent just after 4pm in Rome, hitting session highs. The spread over German bunds reached 280 basis points.

Indicating that relations between Italy and Europe are set to get worse, Italy’s Deputy PM Di Maio said that EU’s Moscovici spoke out against Italy’s budget plan to “upset markets”, adding that there is no reason to question the 2.4% budget deficit.

He also said that the government “will never sacrifice workers on the altar of the spread and of the crazy rules which have been imposed on us,” during a conference with reporters on the sidelines of a conference in Rome. “This government doesn’t butcher people, the music has changed.”

Needless to say, European disagreed, with French finmin Le Maire saying that “I just want to be very clear, that there are rules. And rules are the same for every state. Our futures are linked. All the futures of the euro zone are linked.”

Others quickly piled on: Moscovici doubled down, saying that the Italian authorities’ announced targets appear to be not “compatible” with the EU requirements. “It’s not in the interest of anybody to have a crisis in Italy, with Italy, on the markets or between Italy and the European Commission ,” Moscovici said. “Let’s keep our nerves.”

Dutch Finance Minister Wopke Hoekstra echoed the general concern: “The signals we’ve been getting so far aren’t very reassuring, at the same time many of the details are still unclear,” he said. Although Italy isn’t part of the Eurogroup’s agenda “you can rest assured that this will be a topic on everyone’s mind,” he added.

To summarize: anyone who thought that Europe would greet Italy’s budget with a wink and a smile will be disappointed as it now appears that Brussels will take the process personally, if only to teach Italy’s upstart, populist leaders just who’s the boss.

The result: Italian banks are once again tumbling as the EU hopes to teach Italy a lesson…

… Although the process runs both ways, and the Euro is also sliding as whispers of redenomination emerges once more.