Italian strife threatens new euro crisis

THE Italian stock market has suffered its worst day for two years as investors baulked at the government’s plans to ramp up spending and borrow more money.

The Milan exchange dropped 3.7pc as shareholders launched a selling frenzy over fears the nation will lumber into an economic crisis by racking up huge debts.

Italy’s anti- establishment ruling coalition was recently elected on pledges of a big spending boost, and has now announced it plans to run a budget deficit of 2.4pc in 2019.

That is a major increase on this year’s deficit target of 1.6pc and has sparked fears the country is preparing to live far beyond its means.

The price of government bonds fell sharply, pushing up official borrowing costs, with investors fretting Italy could default on its debt in future. Banks were also hit hard with Unicredit, Italy’s only globally important lender, dropping 6.7pc – seeing £1.8bn wiped off its value. It sets the stage for a clash with Brussels over whether the country is breaking European Union rules.

Ripples from the sell-off spread out across Europe. A major downturn in Italy would reignite fears over the future of the euro and could trigger a crisis across the bloc.

Troubled German lender Deutsche Bank fell 3.8pc in Frankfurt, with investors concerned over its central role in the European economy.

French lenders have many customers in Italy and would suffer from a wave of defaults, which saw Credit Agricole drop 4.3pc while BNP Paribas was down 3.2pc. Professor Costas Milas, at Liverpool University’s Management School, said: ‘The Italian virus has the potential to spread rapidly in other EU countries, and in particular to France and Portugal because of bank exposure to Italian debt.’

He added that data from the Bank of International Settlements suggests that Italy accounts for as much as 10.3pc of French banks’ exposure to debt around the world, while Portuguese banks have a 7.8pc exposure to Italian debt. Even British lenders were ruffled, despite having very little money in Italy, with the nation’s debt accounting for just 0.8pc of assets.

Silvia Dall’Angelo, senior economist at Hermes Investment Management, said: ‘This is a serious situation.’