Now it’s Italy casting a long shadow

GROWING fears over Italy’s ability to service its massive debts weighed on European markets yesterday as embattled premier Silvio Berlusconi clung to power and the country’s borrowing costs soared.

The FTSE 100 Index closed 0.3 per cent lower at 5,510.82 as the yield on Italian ten-year bonds rose to a euro-era high of 6.68 per cent at one stage – a sign investors are losing confidence in the country’s creaking finances.

The Footsie had been down nearly 100 points in early trading but followed US markets higher in the afternoon amid rumours Berlusconi was set to resign – although the premier vehemently denied the reports.

Daniel McCormack, equity strategist at Macquarie, said: “Berlusconi has a terrible track record on reform. Markets are hoping whoever [would replace] him can only be better.”

Fears are mounting over Italy because its borrowing costs are seen as unsustainable and are pushing closer to the 7 per cent level that forced Portugal, Ireland and Greece to ask for bail-outs.

However, it is widely accepted that, as the third-biggest economy in the eurozone and with some £1.6 trillion of debt, Italy is too big to be bailed out and it could potentially cause the euro to collapse.

The pound was up against a weakened euro at €1.16, while sterling fell against the US dollar at $1.60, which was strengthened by its attraction as a safe haven investment.

The latest eurozone turmoil took its toll on riskier stocks from the banking and mining sectors, with Lloyds Banking Group down 0.9p to 27.6p, Royal Bank of Scotland off 0.8p at 22.3p and Essar Energy 5.6p lower at 306.5p.

Glasgow-based engineering firm Weir Group, which makes pumps and valves used in the oil and gas industry, was one of the biggest fallers in the top flight, dropping 4 per cent or 71p to 1,860p, despite forecasting full-year profits in line with market expectations.

Chip designer Arm Holdings, which is dependent on a strong global economy to boost demand for the products it supplies, fell 24.5p to 620.5p.

On a brighter note, shares in Hovis and Mr Kipling maker Premier Foods enjoyed a much-needed rally after the FTSE 250 firm said its lenders had agreed to defer an upcoming test of its loans. Premier rallied 10 per cent or 0.3p to 3.7p.

Another troubled stock, Dixons Retail, was broadly flat at 10.8p after rival Carphone Warehouse announced it would pull its Best Buy stores venture in the UK, resulting in the closure of 11 sites.

Carphone’s shares were still 1 per cent or 3p higher at 348p after it offset the closure announcement by saying it will return more than £800 million to shareholders following the sale of its stake in the Best Buy mobile phone joint venture in the US.

Meanwhile, Rentokil Initial shares were 4 per cent lower after the pest control and washrooms firm revealed more losses from its City Link parcels division. The business has lost nearly £25m so far this year and while Rentokil insisted the current quarter will be better analysts remained unimpressed by the pledge. Shares were 3.8p weaker at 66.3p.