Milan exchange slumps on contagion fears

July 8, 2011 - 10:00 AM

MILAN (AP) — Banks led Italian shares sharply lower Friday amid mounting concerns that the country may get dragged into Europe's debt crisis.

The Milan Stock Exchange was trading 2.7 percent lower by mid-afternoon, though much of the decline was due to very weak U.S. jobs data.

However, Italian shares had been trading lower all day in contrast to other stock markets in Europe, with banks such as Unicredit, Intesa SanPaolo and Banca Monte Paschi particularly bad hit. Financial stocks are particularly heavily weighted on the Milan exchange.

Worries over Italy's financial health have mounted in recent weeks as two credit agencies have warned over the state of the country's public finances.

In the bond markets, investors are asking for higher rates to buy Italian bonds and that's swelled the spread with benchmark German bunds.

The spread between 10-year Italian and German bond yields grew to a new record 2.45 percentage points, with the interest on a 10-year Italian bond rising to 5.36 percent compared to 2.91 percent for the German equivalent.

Though Italy's borrowing costs are way lower than those prevailing for the eurozone's three bailout recipients, Greece, Ireland and Portugal, they are beginning to rise towards those Spain is having to pay. Spain is widely thought to be the next most-imperilled eurozone country. Its 10-year yield stands at 5.65 percent.

The recent spike in Italian yields has come despite a euro48 billion ($68 billion) austerity package from the Italian government, which is currently going through Parliament. The cuts aim to balance Italy's budget by 2014.

The cuts are coming even though the Italian economy continues to recover slowly from recession.

Official figures earlier showed that Italian industrial output contracted by a 0.6 percent in May from the previous month. That was the first fall since January. Analysts said the breakdown reveals broad-based weakness.