European shares fell on Wednesday as rising tensions around Italy's debt situation pushed its bond yields into the danger zone, hitting riskier assets across the board and sending shares in financials sharply lower. After rallying at the open on news Prime Minister Silvio Berlusconi was set to resign, an increase in margin call on Italian debt by LCH.Clearnet and Italy's top clearing house pushed 10-year paper to 7.5 percent and sent stocks tumbling.
The increase in margin calls took the debt crisis to a new level and risked becoming a "self-fulfilling prophecy", Luca Solca, head of European research at Cheuvreux, said, if more buyers head for the exit. The move past the 7 percent level, seen by many analysts as unsustainable, prompted aggressive buying of Italian debt by the European Central Bank, which in turn took some of the edge off both equity and bond market runs.
After focusing on Greece over recent months, debt market speculators are now targeting Italy - the third-biggest eurozone economy, Europe's largest debtor nation and one considered by many analysts as "too big to bail". By the close, the FTSEurofirst 300 was down 1.8 percent at 966.22, off its intraday high of 993.44, although benchmark Italian debt remained stubbornly high at 7.2 percent and the country's blue chip bourse closed down 3.8 percent.
Insurers and banks were among the worst-hit sectors across the region, with the STOXX Europe 600 Banks index down 3.7 percent, weighed by a 6.8 percent fall for leading Italian lender UniCredit. The firm holds 38.6 billion euros of Italian government debt.
Taking most points off the FTSEurofirst 300, however, was UK-listed lender HSBC, which fell 5.8 percent in volume more than twice its 90-day daily average after the market turmoil caused by the debt crisis marred its trading update.
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