Italy's fiscal woes drag banking sector lower

Eurostoxx 50:2,709.14 (–80.95) Frankfurt DAX:7,230.25 (–172.48) Paris CAC:3,807.51 (–106.04)

CONCERNS OVER Italy continued to fester yesterday, hitting the European banking sector and leaving the region’s equity markets nursing heavy losses.

Fears that Italy may be the next euro zone economy to become embroiled in the sovereign debt crisis were heightened after unconfirmed reports that the euro zone’s bailout fund may have to be doubled to €1,500 billion to cover a debt crisis for Rome.

Italian bond yields climbed to new highs, forcing yields on other periphery debt higher, while the cost of insuring Italy’s sovereign debt against default reached a new record.

Following last week’s sharp losses in Italy, the country’s stock market regulator moved to curb short selling by forcing traders to reveal their positions.

Over the five sessions last week, the FTSE MIB index lost more than 7 per cent as banks were shorted heavily. This involves dealers selling stock, then covering these positions by buying the stock in the market at the sold-down price.

“Even though other European countries have taken such measures before, it can hardly be interpreted as a sign of confidence,” said Lena Komileva at Brown Brothers Harriman.

Indeed, investors appeared to be in panic mode, with selling reminiscent of the height of the post-Lehman Brothers financial crisis.

UniCredit, which last week fell nearly 20 per cent, gave up early gains and fell 6.3 per cent to €1.15.

Intesa Sanpaolo, down 13.5 per cent last week, lost 7.7 per cent to €1.53.

Mediobanca, the country’s biggest investment bank, fell 4.3 per cent to €6.15, while insurer Generali shed 4.6 per cent to €13.02.

Banks based in the core euro zone fell sharply on fears of their exposure to the periphery. Belgium’s Dexia lost 8 per cent to €1.84, Germany’s Commerzbank fell 8.6 per cent to €2.71, while Dutch financial services group ING slid 7.3 per cent to €7.79.

Swiss chemicals group Lonza gained 0.9 per cent to SFr67.40 after announcing it was to buy US company Arch Chemicals for $1.2 billion. Lonza, the world’s biggest maker of drugs ingredients, said the purchase would help it expand its non-pharmaceuticals business. – (Copyright The Financial Times Limited 2011)