(Bloomberg Opinion) -- We all know Italy’s next crisis is coming, it’s merely a question of when. The country’s budget deficit is slipping out of control and Brussels will at some point have to address the increasingly likely breach of its fiscal rules (even if the EU is turning a blind eye while this month’s European parliamentary elections are taking place). The bond market is starting to wake up to the risk.

The chances of Italy ever achieving its initial 2.04 percent deficit target for 2019 – already revised up to 2.4 percent – were always fanciful. But as the economy slips into recession, that newer figure looks dicey as well. The miss might well be too big for the European Commission to sweep under the carpet.

It’s not just the yearly deficit that’s headed in the wrong direction; the overall ratio of debt to GDP (sitting at 130 percent currently) may increase too. Italy is already the euro zone’s worst performer on that measure after Greece, and any deterioration will cause serious consternation in Brussels. The country is the region’s largest debtor, with more than 1.6 trillion euros ($1.8 trillion) of debt. It truly is too big to fail.

Italian industrial orders fell 2.7 percent in March, and there’s little evidence of any recovery in the works. The government has downgraded its growth forecast for this year to just 0.2 percent, closer to many independent estimates. This still looks too hopeful. No wonder some European Central Bank officials are wondering whether the euro area economy can rebound in the second half.

The Bank of Italy’s chief economist says the nation’s 2020 budget deficit will expand to 3.4 percent, breaching the EU limit, unless value-added tax is increased. Yet when Finance Minister Giovanni Tria made similar comments about the parlous state of Rome’s finances, he was swiftly put back in his box by the country’s populist rulers. This state of denial from the League-Five Star coalition is not going to end well. The government is going to have to address its finances in a convincing manner after the European elections if it is to avoid another bond rout.

The markets are just about starting to pay attention. Italian 10-year bonds have been very popular this year, but the yields on them have widened over the past week. In fairness, they’re not too far out of whack with other countries’ debt and are well below the highs they hit last year after the country’s political crisis exploded. We aren’t back in emergency territory. Nevertheless, investors are starting to position for what’s seen as an inevitable repeat of last autumn’s budget showdown between Brussels and Rome, which pushed Italy’s 10-year yields above 3.5 percent. Some banks such as Citigroup Inc. are urging caution.

While it may seem an age away, Moody’s Investors Service is due to review Italy’s Baa3 credit rating in September. That’s already the lowest rung of the investment grade scale and if the ratings agency cut it to junk, the consequences would be seismic. It would prevent many bond funds from holding Italian debt.

The greater returns you get for Italian debt over the other core European countries are there for a reason. As the risk increases, so will the spread.

(This column has been updated to correct the bond yield data in the third from last paragraph.)

To contact the author of this story: Marcus Ashworth at mashworth4@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

©2019 Bloomberg L.P.