Jitters coursed through Italian financial markets on Friday following warnings of possible downgrades by ratings agencies and amid fears of contagion from Greece's sovereign debt crisis.
The spread between Italian and German 10-year bonds hit 212 basis points — their highest level since the creation of the euro, while banking shares suffered a shock plunge following market rumours of an imminent downgrade of Italy's sovereign rating.
'The contagion risks of the Greek crisis on other countries have been worrying the markets for several days and we see very clearly today that Italy is in the line of fire,' one analyst in Milan said on condition of anonymity.
Shares in Italy's largest bank, UniCredit, plunged more than eight per cent during trading before recovering somewhat to close down 5.54 per cent.
Other lenders were also hit by the volatility including Banca Popolare di Milano, Banca Monte dei Paschi di Siena, Intesa Sanpaolo and Mediobanca.
Italian business daily Il Sole 24 Ore called the action 'a midday of fire' and said there had been 'panic' and 'schizophrenic' trading in Milan.
The newspaper said there had also been a rumour that some Italian banks may not pass the stress tests being carried out on Europe's banking system.
It added that some traders were linking the volatility to the announcement in Brussels that Italian central bank governor Mario Draghi will replace Jean-Claude Trichet as head of the European Central Bank in November.
Draghi has earned a strong reputation in Italy for his handling of the financial crisis, which left the Italian banking system relatively unscathed.
The benchmark FTSE Mib index ended the day down 1.61 per cent, while other European bourses were only slightly down and London was up 0.41 per cent.
'I see hysteria on the risk of contagion... that is exaggerated,' Fabrizio Saccomanni, director general of the Bank of Italy and a favourite to replace Draghi, said in a speech in Rome.
Italian officials have warned of the possibility of speculative attacks in recent weeks and have said the actions of ratings agencies are unwarranted.
Source : New Age
