ITALY and Spain have sent shockwaves through the eurozone as their deepening debt crises sparked a collapse in banking shares across Europe.
Political uncertainty in both countries has led to an exodus of investors who are seeking to satisfy their cravings for stability elsewhere.
The two-week sell-off has plunged cash-strapped Italy even further into the red and there are now real fears of a Greek-style financial crisis which would bring the country to its knees.
The mood across the eurozone’s markets grew even more jittery when Italy’s populist Lega and Five Star Movement once again failed to get presidential approval for a new government with leaders divided over whether to appoint an arch-Eurosceptic as finance minister.
The situation has now been exacerbated by the prospect of a government collapse in Spain after the main opposition party called for vote of no-confidence in the minority rule of prime minister Mariano Rajoy, whose centre-right Popular party has been racked by a campaign finance scandal.
Socialist leader Pedro Sánchez’s decision to table the confidence vote sent the main Spanish stock index down 2.7 per cent but most of the political and market focus is still on Italy.
Austrian chancellor Sebastian Kurz said: “We saw in Greece how dangerous it is if a country has a bigger and bigger debt and I hope that we will not have a second Greece in our neighbouring country, Italy.”
Credit ratings agency Moody’s delivered another blow by placing Italy on review for a downgrade citing “significant risk of a material weakening” in Italy’s fiscal strength and the “risk that the structural reform effort stalls and that past reforms are reversed”.
Spain is in a less precarious situation despite an EU-funded bank rescue in 2012, having sharply cut its budget deficit and chipped away at its national debt in recent years.
But the fresh political instability, which could precipitate snap elections, comes at a difficult time, with investor sentiment beginning to turn against the eurozone.
Mark Dowding of investment group BlueBay Asset Management said: “It’s easy to see how vulnerable heavily indebted countries can become if investor confidence is eroded.”
Luca Cazzulani of UniCredit said: “While there have been a few other such episodes since the start of quantitative easing, this is the strongest one given the very high uncertainty on Italy, investors are likely to remain cautious for now.”
Shares in Italian banks and other financial stocks also fell sharply.
Banco BPM fell 7.5 percent, while lender Intesa Sanpaolo fell by 4 percent. UniCredit, UBI Banca and Mediobanca all lost around 3.5 percent.
But Italy’s political saga rumbles on with anti-establishment Five Star Movement leader Luigi Di Maio and his Lega coalition partner Matteo Salvini have backing Paolo Savona, an 81-year old Eurosceptic economist, as finance minister.
But resistance from Italian president Sergio Mattarella, who is said to be worried Mr Savona could damage Italy’s credibility in the EU and the markets, has held up the formation of a government.
Political newcomer Giuseppe Conte, tipped as prime minister at the start of last week, was expected to propose his cabinet on Friday and have it sworn in at the weekend, but he held an “informal” meeting with Mr Mattarella instead and did not present a list of ministers.
Mr Salvini posted a brief message on social media saying: “I am truly angry.”