LONDON (Reuters) - A worsening political crisis in Italy provoked a second day of selling on European markets, with the euro cut to an 11-month low, stocks punished and short-term borrowing costs surging for the government in Rome.
Investors fear that repeat elections - which now seem inevitable in the euro zone’s third-largest economy - may become a de facto referendum on Italian membership of the currency bloc and the country’s role in the European Union.
Short-dated Italian bond yields — a sensitive gauge of political risk — soared as much as 80 basis points IT2YT=RR to their highest since late 2013 as investor anxiety grew. [GVD/EUR]
The euro dropped towards $1.15 EUR=EBS for the first time in close to a year, down 0.8 percent on the day. Against the Swiss franc EURCHF=, it fell to 1.15 francs. [/FRX]
Stocks in Milan slid 2.6 percent on the main index .FTMIB after a 2.1 percent fall on Monday. Bank shares .FTIT8300 slumped another 5 percent after losing 4 percent in the previous session, bruised by the sell-off in government bonds, a core part of bank portfolios.
"It is just a slide, and as the slide continues, you ask where is the end," said Saxo Bank's head of FX strategy, John Hardy. Global contagion is a risk, he said, with the benchmark U.S. S&P 500 stocks index .SPX also close to breaching some key support levels. [.N]
Hardy recalled a promise made in 2012 by European Central Bank President Mario Draghi to keep the euro intact.
“If this continues for another couple of sessions, I think you will have to see some official (European) response.
