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 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 4 pm in Rome, hitting session highs. The spread over German bunds reached 280 basis points.