At least two major banks have predicted that ratings agencies will lower Italy's sovereign credit rating to just one level above "junk" status.

Italy is at loggerheads with European commissioners over a proposed budget that would increase the country's deficit to 2.4 percent of annual economic output during 2019. The country's populist and partly right-wing coalition want the fiscal blow out in order to make good on pre-election pledges.

Brussels has rejected the plan, citing Italy's already huge debt pile. The clash has roiled markets, sending the yield spread between Italian and German 10-year benchmark bonds to a fresh five-and-a-half year high. Shares of the country's banking sector were also down 5 percent at one stage during Friday's session.

The uncertainty comes as two of the three major ratings agencies are readying reviews for Italy's sovereign credit rating, which currently sits at "BBB." S&P will decide on Friday October 26 while Moody's has said it will conclude its review before the end of the month.

Standard Chartered's rate strategist, John Davies, said Friday that his bank expected to see a one notch ratings downgrade. That would take Italy to just one level above a "junk" rating which would trigger forced selling of Italian assets. A ratings downgrade essentially means that analysts are telling clients that it has become riskier to lend money to that particular government and it often leads to a sell-off in those bond markets.

"The ratings agency induced pressure by the market will force Italy to back down," Davies said by phone Friday.

The strategist added that should Italy eventually bend to Brussels, this would "calm current nerves" and bring Italian yields lower. Davies warned however that the market won't bring yields all the way to levels last seen in May, before the political spat began.

"The market will still be looking at an Italy with a much less predictable government and a lower credit rating against a backdrop of fading ECB (European Central Bank) QE (quantitative easing) purchases," he added.

UBS is another bank predicting a ratings downgrade for Italy.

In a note Friday, the Swiss bank said its base-case scenario is for both S&P and Moody's to issue a one-notch downgrade, while tagging on a "stable outlook."

It said should such an outcome materialize, the spread between 10-year Italian and German debt — which is used as a fear gauge for euro zone troubles — should retreat from around 330 basis points back into a 250 to 300 range.