While the market turmoil over Italy's budget has quieted down in recent weeks as a result of soothing words by the ruling coalition that it would comply with European demands, that snapped moments ago when DPA reported that the leader of Italy's Five Star Movement has threatened to pull the plug on the country's populist government if it cannot find money to implement election campaign promises.

"If we do not find the resources to do what we have said, then it is better for us to go home, there is no point in scraping by," M5S leader and Deputy Premier Luigi Di Maio told Radio 24.

As a result of budget limitations imposed by Brussels, the M5S and its coalition partner, the League, are struggling to find resources for three major pledges: cutting taxes, lowering the pension age and introducing basic income subsidies for the poor.

Di Maio's remarks piled pressure on Finance Minister Giovanni Tria, a technocrat who is resisting calls to increase the deficit because this could heighten the risk of a financial crisis.

"If we need a bit of deficit to improve the quality of life of Italians, we should remember that the priority is to improve the lives of Italians, not to reassure markets," Di Maio said. Risk indicators on Italy's sovereign bonds have surged in recent months, on the back of investors' fears of reckless public spending. Italy already has very high public debt.

As a reminder, the Italian government is supposed to set debt and deficit targets for next year by September 27, and to present detailed 2019 budget plans to the European Commission by October 15. Meanwhile, according to Wolfango Piccoli, an analyst at Teneo Intelligence consultancy, the M5S needs to score a political victory on the budget to make up for its declining popularity vis-a-vis the League.

In response to the news, Italian bonds fell with yields on 2Y bonds spiking.