FTSE falls as Italy debt yields spook investors

BRITAIN’S top shares sank to their lowest close for a week yesterday on spiralling concerns over Italy’s debt as the country’s bond yields raced to dangerous levels.

Italy was thrown into the spotlight as its 10-year bond yields shot above seven per cent, levels that forced bailouts in Ireland, Portugal and Greece, and as investors dumped the debt after a clearing house increased margin calls.

The spike in yields came in spite of European Central Bank buying.

Silvio Berlusconi’s pledge to step down as Italy’s prime minister failed to calm markets.

Financials came under severe pressure, with HSBC, Royal Bank of Scotland and Barclays all left nursing drops of more than five per cent, as investors worried the sector’s exposure to Europe’s debt crisis could cost them dear.

HSBC’s fall was also driven by a larger-than-expected drop in third-quarter profits for Europe’s biggest bank.

When European leaders agreed their most recent bailout package, the deal imposed 50 per cent losses on private sector Greek bondholders. Italy could be a different story.

“I’m not sure that they (markets, banks) could afford to take a substantial haircut on the world’s fourth biggest bond market,” Darren Sinden, trader at Silverwind Securities, said.

The UK benchmark closed down 106.96 points, or 1.9 per cent, at 5,460.38, its lowest close since 1 November, erasing the previous session’s one per cent gain, and having opened almost one per cent higher.

Heading the list of fallers, car insurer Admiral dived 25.6 per cent after it warned its full-year profits would be hit by big claims.

Shore Capital cut back its EPS forecasts for Admiral for 2011 and 2012 by up to eight per cent and reduced its dividend estimates for the same years by up to 7.3 per cent.