Euro tumbles after Berlusconi resignation announcement

European stocks closed sharply lower yesterday as any early optimism that the resignation of Italian Prime Minister Silvio Berlusconi would calm the markets disappeared in a wave of near panic.

Dealers said investors first thought Mr Berlusconi’s decision would clear the decks but as it became clearer that Italy faces possibly months of political uncertainty, they decided on safety first and put their money elsewhere.

Italian borrowing rates soared as a result to seven per cent and above, levels judged to be unsustainable in the longer term and putting its already strained public finances under even more pressure. In the fallout, stock markets stumbled badly and the euro tumbled as investors flocked into safehaven US and German government bonds, seen as the benchmark holdings to have in troubled times.

“The Italian bond market is in distress,” said Kathleen Brooks, an analyst at traders Forex.com.

“Although Mr Berlusconi pro-mised to resign after the passage of austerity reforms get through parliament, the bond market may be reacting to the potential for a fractious coalition government getting into power, which could only exacerbate Italy’s fiscal situation,” she added. In London, the FTSE-100 index of top companies closed down 1.92 per cent at 5,460.38 points. In Paris, the CAC-40 lost 2.17 per cent to 3,075.16 points and in Frankfurt the DAX 30 dropped 2.21 per cent to 5,829.54 points.

Milan led the losers, falling 3.78 per cent after being down more than 4.0 per cent at one stage. Madrid, also seen as a possible eurozone debt crisis victim, was down 2.09 per cent. Some analysts said the crisis could be at the tipping point; with Italy too big to bail out given its economy is the third largest in the eurozone, accounting for 20 per cent of the bloc’s output.