Debt crisis: Investors bail out amid Italy fears
INVESTORS fled from the markets today as Italy's borrowing costs surged into "bailout territory" and thrust the country into the heart of the eurozone debt crisis.
The FTSE 100 Index was 1.6pc lower as the yield on Italian 10-year bonds rose from 6.37pc to a euro-era high of 6.64pc - a sign investors are losing confidence in the country's creaking finances.
The rise - which came amid increased political uncertainty in Italy, as Prime Minister Silvio Berlusconi prepares for a crunch vote on public finances - prompted fears that Italy would follow Greece, Ireland and Portugal in needing a bailout from the EU and IMF.
Kathleen Brooks, research director at Forex, said: "It's hard to see how investors can live with Italy on the cusp of a bailout, so risk is likely to remain under pressure in the near term."
The developments in Italy, which is the eurozone's third-largest economy and has debts worth 120pc of national income, pulled focus away from Greece, where Prime Minister George Papandreou resigned.
The banking sector was once again hit by fears of its exposure to sovereign debt with Lloyds Banking Group down 4pc and Barclays and Royal Bank of Scotland off more than 3pc.
Elsewhere in Europe, Germany's Dax and the Cac-40 in France fell more than 1.5pc.
The surging borrowing costs in Italy are the latest twist in the ongoing debt crisis in Europe, which has dominated the markets for weeks.
Ms Brooks said the outcome of tomorrow's vote in Italy - which is also viewed as a confidence vote in Mr Berlusconi - was key to how the markets performed this week.
She said: "The result of this vote will be crucial for risky assets, a no vote could see Italian bond yields surge and the euro and other risky assets plummet."
Greece was previously at the forefront of investor concerns after Mr Papandreou announced shock plans to hold a referendum on a crucial eurozone rescue deal.
Mr Papandreou reneged on his pledge and despite surviving a confidence vote on Friday has resigned amid chaos over his handling of his country's part in the debt crisis. A leader for the new Greek government will be unveiled later.
Meanwhile, traders nervously await the outcome of a meeting of eurozone finance ministers, who are likely to discuss the next tranche of bailout funds for Greece and the worsening situation in Italy.
Elsewhere, the underlying problems in the eurozone were highlighted by figures showing a sharp fall in retail sales volumes in September.
Governments across the region are struggling to roll out tough austerity measures to tackle rising debt while their economies are stagnating.
The uncertainty benefited safe haven stocks, with the price of gold 0.9pc higher at $1771.8 an ounce and the US dollar rising against most major currencies.
Meanwhile, oil costs fell with Brent crude in London dropping 0.3pcto $112.07 a barrel and light sweet crude on the New York Mercantile Exchange down 0.8pc at 93.5 US dollars.