Italy's President approved the appointment of Giuseppe Conte as Prime Minister Wednesday, paving the way for a anti-establishment coalition government in Europe's third largest economy that could test both the faith of international investors and the patience of officials in Brussels.

Conte, a relatively unknown law professor with close ties to the leader of the radical left Five Star party (5SM) which, along with the anti-European Liga party will form Italy's 66th government since the Second World War, promised to respect European rules even after he given the leadership mandate by President Sergio Mattarella during a meeting in Rome.

"I'm preparing myself now to defend the interests of all Italians in all places, in Europe and internationally," Conte said. "I will be the defense lawyer for the Italian people."

Italy's political chaos have wreaked havoc on its financial markets and helped pull the European single currency to a six month low of 1.1686 against the U.S. dollar Wednesday as investors fret over the fiscal ambitions of the Five Star/Liga coalition, would could add around €100 billion to Italy's rising deficit, and its plans to issue de-facto parallel currency that could raise legal challenges in Frankfurt and Brussels.

Italy's benchmark FTSE MIB index closed 1.31% lower on the session Wednesday at 22,911.74 points, extending its three-week decline to around 11.8%. Benchmark 10-year bond yields, meanwhile, have soared 2.41%, taking the extra yield, or spread, that investors demand to hold them instead of triple-A rated German bunds to a one-year high of 1.93%.

#Bond investors fear #Italian populists more than Putin's Russia

— Luca Gualtieri (@Luca_Gualtieri1) May 23, 2018

"Given its systemic importance, Italy is a source of potentially significant spillovers to the rest of the euro area," the European Commission said Wednesday in a report that pushed for a faster reduction of its €2.2 trillion debt pile and warned against increasing deficit spending. "Moreover, Italy's economy maintains strong financial linkages to other euro area countries. In particular, French banks remain in the lead."

5SM and Liga, a collection of parties that have gathered support in the poorer south and the more prosperous northern regions of Italy respectfully, were the two big winners in March's national elections, gathering 56% of the vote. 

Goldman Sachs estimated that the coalition government's plans for basic income increases, the scrapping of proposed pension reforms and the cancellation of an upcoming increase in sales tax could cost the economy as much as €60 billion, or 4.5% of GDP, over the next three years.

Italian bank shares, which comprise a heavy weight on the FTSE MIB benchmark, were marked 1.74% lower by the close of trading today, according to the FTSE Italia Bank Index, and fallen more than 12% over the past month as investors worries about a component of the plan that could make the sale of non-performing loans on their balance sheets more difficult.

Italy is simultaneously Europe's third largest and the Eurozone's most indebted member state, with one of the world's biggest debt piles and a staggering debt-to-GDP ratio of 132%. Its antiquated banking system, whose foundations were built in the 1600s, is teetering on edge of a mountain of bad loans (€285 billion) that are only now just being shifted to specialised investors and private hedge funds.