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European shares sag as Italy debt worries eclipse Berlusconi Italian PM's pledge to quit fails to boost the continent's major stock indexes, as investors worry over his successor
European stocks were lower at midday on Wednesday as mounting concerns over Italy's debt kept investors on edge, following an early rally sparked by Silvio Berlusconi's pledge to step down as Italy's prime minister. Global lender HSBC featured among the biggest losers, sinking 5.3 per cent after posting a drop in underlying profit, hurt by lower investment banking income and a surge in bad debt in the United States. The FTSEurofirst 300 index of top European shares was down 1.7 per cent at 966.78 points by mid-morning, having wiped out Tuesday's 0.9 per cent gain. Italy's benchmark FTSE MIB index tumbled 4 per cent, with Mediobanca down 5.9 per cent and UniCredit down 5.8 per cent. "There is no guarantee (Berlusconi's) successor will be able to do a better job. Just keep your eyes on the Italian yield for now," Christian Jimenez, fund manager and president of Diamant Bleu Gestion, said. "As long as the 10-year bond yield remains above 5 per cent, there is no green light to buy European stocks." Berlusconi said after European markets closed on Tuesday he would quit as soon as the Italian parliament passed budget reforms urged by European partners to help Italy stave off a debt crisis threatening the eurozone. Votes on the reforms are likely this month in both houses of parliament and opposition leaders may try to bring this forward. But his pledge failed to stop Italian bond yields from rising, with yields on 10-year benchmark Italian government bonds piercing through the key 7 per cent level on Wednesday, which many analysts deem unsustainable for the country. "My read of it ... is that (ECB) official money is being held back from buying the Italian bond market in order to put pressure on the Italian political system to deliver on the structural reforms that they want," Andrew Bell, chief executive at Witan Investment Trust, said. "But I think there is a danger that the politicians or the ECB don't understand or can't quantify the risk of creating a tipping point in market confidence," he said. "And at that point, banks may start to withdraw lending or depositors start to taking money out of the garlic belt countries and put it in Germany or whatever, and they don't immediately reverse that next week if the ECB starts buying bonds. I think they are playing Russian roulette with market confidence."
