Italy's political turmoil is invoking memories of the 2011 eurozone crisis and also raises questions about the future of the country, both within the EU and the currency union.
Markets have tumbled as the cost of Italy's short-term borrowing rocketed and banks holding Italian sovereign debt nursed sharp falls in their share prices.
The Vix-index - the so-called fear index for investors - leapt by 17 per cent, hitting a peak not seen since the start of May, according to the Daily Telegraph.
Both the European Central Bank and the Bank of Italy have warned of the dangers of a loss of trust in systems and institutions, and yesterday Italian short-term treasury bonds had their worst day since 1992.
Fresh Italian elections are now expected in the autumn, which is set to become a referendum on sovereignty, as polls show the eurosceptic League party gaining ground, offering the alarming possibility that the eurozone's third largest economy could decide to ditch the shared currency.
The timing of the new elections is especially sensitive for the eurozone's central bank, which is due to stop its bond buying efforts, set up to cushion the impact of the financial crisis at the end of the year. It also holds about 15 per cent of Italian debt.
What happened?
The political and market storm has followed the refusal of Italy's president, Sergio Mattarella, to accept the nomination of the vehemently eurosceptic finance minister, 81-year-old professor Paola Savona, whose name was put forward by a populist coalition formed by The Five Star Movement and League parties.
Mattarella issued an explanation for his decision, saying that Savona was someone who could probably, or inevitably, "provoke Italy's exit from the euro".
Italian President Sergio Mattarella. Photo / AP
He says that any decision to leave the euro, or even to consider leaving must be done "openly" and after "serious in-depth analysis".
It was also an issue that was not brought up during the recent election campaign, he argued.
Mattarella then called on a former International Monetary Fund official, Carlo Cottarelli, a known fan of austerity nicknamed "Mr Scissors", to set up a caretaker government.
What else is going on?
There has also been a storm brewing in debt markets due to other political factors.
Mattarella's move to block Savona's appointment may have scuppered the immediate plans for the populist coalition to form a government on Sunday.
However, credit ratings agency Moody's, among others, had already raised a red flag about the likely impact of such a coalition's plans.
The proposals to slash taxes, introduce a very costly universal basic income, and reverse some hard won pension reforms provoked fears about Italy's public debt.
At more than 132 per cent of gross domestic product, the nation's debt is second only to Greece within the eurozone.
New premier-designate Carlo Cottarelli addresses the media. Photo / AP
On Friday, Moody's said that the likely government's plans posed a "significant risk of a material weakening in Italy's fiscal strength".
This, combined with the risk that "past reforms such as the pension reforms" could be reversed, put the country on review for a possible credit rating downgrade.
The head of Italy's central bank, Ignazio Visco, has called its high ratio of debt to GDP "the main source of vulnerability for the economy".
This means it is not a good time to go on a €100 billion ($167b) spending spree, and add as much as 5 per cent to 6 per cent to Italy's budget deficit.
The country has also lagged its eurozone counterparts in terms of economic growth. The narrative of its last election reflected this disparity heavily.
What role has the eurozone integration row played?
There is also a bigger question that cuts to the heart of the future of the eurozone: that of closer monetary and fiscal union.
French-led calls for more centralised budgetary and tax raising powers are a matter of huge division within the currency bloc.
Angela Merkel recently lent her backing to plans for a rainy-day fund, modelled on lender of last resort the IMF, much to the dismay of many German conservatives.
The proposals have been severely criticised by other finance chiefs, including those of the Netherlands and Ireland.
These chiefs blasted their -"far-reaching" scope and again raised concerns that they would only add to the dominance of France and Germany within the bloc.
Economists say that moves towards greater integration inevitably mean that some countries' taxpayers will have to underwrite others.
This is a matter of grave concern following the Greek bailout and major weaknesses within the Italian banking system.
Italy's ties to European Union are under threat by political moves in the country. Photo / Getty Images
Last year, the country's fourth biggest lender, Banca Monti dei Paschi di Siena, was given a €5.4b additional bailout.
This took the total amount of Italian taxpayer funds used to rescue banks to more than €20b in July 2017.
Closer union could, it is feared, leave other nations on the hook for similar future bailouts.
High levels of non-performing loans, which stand at more than double the average of other eurozone banks, make other states within the currency union extremely nervous about sharing Italy's financial risks.
Documents leaked earlier this month revealed that the Five Star Movement was considering asking the ECB to bail out some €250b worth of Italian debt, sending bond markets into a spin.
How have markets reacted?
There has been a weakening of the currency amid a weakening of trust in institutions.
The euro fell to a low of $1.15, a level not seen since November last year.
Yields on two-year Italian treasury bonds rose sharply to 2.73 per cent, up by more than 150 basis points.
Benoît Coeuré, a member of the executive board of the ECB, warned on Friday last week of how "fragile" trust in the ECB had become with 47 per cent of eurozone citizens saying they do not trust the central bank.
With fresh elections likely, Italy's ties to the euro are more fragile than ever. Photo / Getty Images
"In other words, even though distrust in national institutions is reportedly even lower, it may no longer be enough for central banks to deliver low and stable inflation for people to trust them," he said.
Visco warned that Italy was at "serious risk of losing the irreplaceable asset of trust" and that the trust that investors and businesses had in Italy "must not be frittered away in actions that will not affect growth potential and may even risk reducing it".
What's next?
Former Greek finance minister and economist Yanis Varoufakis says the situation is not yet "like what we saw in 2011".
"The reason for that is because Mario Draghi [ECB governor] is still in Frankfurt and he's still printing [money] as if there's no tomorrow. He is therefore guaranteeing anyone who's buying Italian bonds... for how long that will continue, one doesn't know."
The timing of future elections and the weakening of the Italian economy in the face of growing political uncertainty could also present a major policy challenge for the ECB.
It is expected to end its bond buying programme at the end of the year.
This could coincide with fresh Italian elections, expected as soon as the autumn, if Cottarelli's government fails to win a vote of confidence.
That could trigger a government spending splurge and a rush of capital out of the major eurozone economy.
