(The opinions expressed are those of the author, a columnist for Reuters)
By Jamie McGeever
LONDON, May 29 (Reuters) - Euro zone markets are gyrating like it's 2012, with political crisis in Italy blowing out peripheral yield spreads and triggering the strongest demand for safe-haven German bonds since the depths of the euro crisis six years ago.
But at the risk of uttering the dreaded words, this time it's different - it's almost impossible to believe that the ECB will stand by and allow domestic political crisis in Italy to descend into an existential crisis for the euro zone.
"Whatever it takes", to quote ECB chief Mario Draghi's famous commitment from 2012, will avert "Quitaly", if push comes to the shove.
Still, the rise in Italian yields and spreads under way now is astonishing. The 10-year Italian/German yield spread rose above 300 basis points on Tuesday, meaning it has more than doubled in just two weeks.
Italy's two-year yield rose above 2 percent on Tuesday, significantly higher than the two-year Greek yield, and well on track for its biggest one-day rise since 1992.
This is causing serious pain for Italian banks, which are among the biggest holders of these bonds. Their balance sheets and ability to raise financing on money and bond markets are getting hammered, which will be ringing alarm bells at the ECB.
The wave of selling on Tuesday also strongly suggests financial markets are now pricing a euro break-up premium into Italian bonds and bank stocks, and even the euro. This is anathema to the European Central Bank and will prompt it to act.
The risk of a euro break-up forced the ECB's hand six years ago. The difference today is not that investors doubt the ECB stands ready to help Italy, but that Italy wants that help at all. Italy itself may choose 'Quitaly', which is a different proposition for the ECB and euro policymakers entirely.
If the ECB is forced to act it could expand and tweak its current bond-buying programme, provide emergency funding for Italian banks, or dust off and deploy the Outright Monetary Transactions programme if Italy is forced to take financial support from the euro zone bailout fund.
It could employ a mix of all of the above or come up with entirely new measures.
The 2011-12 debt crisis showed that the ECB is flexible, creative, and willing to bend or suspend its rules. The list of acronyms for its unconventional policy measures and programmes is lengthy, including: OMT, LTRO, SMP, APP, CSPP and CBPP.
This was a hill on which two high profile German policymakers at the ECB were willing to sacrifice themselves. Successive Bundesbank chiefs Axel Weber and Jurgen Stark both argued in protest at the direction the ECB was headed but ultimately lost those arguments and quit instead.
The euro zone's last existential crisis prompted Draghi to deliver his now famous remarks in London on July 26, 2012 that the ECB would do "whatever it takes to preserve the euro. And believe me, it will be enough."
Back then Italy's 10-year bonds yielded 540 basis points more than German bonds, Spain's more than 600, Portugal's almost 1,000 and Greece's almost 3,000. Speculation was rife that any one of these countries was about to crash out of the euro, bringing the whole currency union down with it.
Then Draghi stepped in. And whatever else has happened since - in terms of euro zone politics, banks, financial markets, the economy, and monetary and fiscal policy - it's unarguable that the euro was saved.
The ECB went all in with unconventional policy which included negative interest rates, a sovereign bond-buying programme running into the trillions, and cheap loans worth hundreds of billions to the 19-nation bloc's banks. Italian banks were among the main beneficiaries.
Six years on, the ECB is looking at exiting these crisis-era policies as smoothly as possible with minimum market disruption. It's a process that isn't scheduled to start until later this year at the earliest, and would take years to complete anyway.
But the current standoff in Italy will almost certainly put that on hold, maybe for a very long time. It could also push the ECB to take more, yet to be determined emergency measures.
Italy is set for fresh elections after the president appointed a former IMF official as interim prime minister once anti-establishment forces had abandoned their efforts to form a coalition government at the weekend.
These elections are likely to be fought over Italy's role and very place in Europe and the euro zone. Investors are dumping Italian assets and the euro on fears that the third largest euro zone economy and third largest bond market in the world, could crash out of the euro.
Visibility on what happens next, in terms of the makeup of Italy's next government, elections, and what credit ratings agencies, the ECB and euro zone leaders do, is low. Investors are choosing to dump Italian assets now and ask questions later.
Ultimately, however, it will boil down to whether they believe Italy is bankrupt, will default, leave the euro, or that the ECB will allow the euro project to fall apart. Of course, anything can happen. But the answer to those questions, right now at least, has to be "no".
Reporting by Jamie McGeever Editing by Richard Balmforth