Markets hit by fresh turmoil

■ FTSE slumps to lowest level this year
■ Swiss authorities slash interest rates
■ Berlusconi: We will fight for Italy

MARKETS continued their sell-off yesterday as Eurozone leaders failed to contain the financial crisis that is engulfing Italy and Spain – countries viewed as “too big to fail”.

Italian Prime Minister Silvio Berlusconi waited until markets closed to address parliament for fear of exacerbating the turmoil.

He then sought to reassure investors: “The country is economically and financially solid. In difficult moments, it knows how to stay together and confront difficulties,” he said.

“The government and parliament will act, I hope, with a large political and social consensus to fight every threat to our financial stability.”

He was speaking after yields on Italian and Spanish debt both closed above six per cent for the third day in a row, a level dangerously close to the seven per cent threshold seen as unaffordable for both countries’ finances.

The FTSE 100 fell 2.3 per cent to its lowest level so far this year and the Dax fell by over two per cent for a third day running. European banking stocks also closed down, with Italy’s biggest bank Intesa Sanpaolo falling 2.7 per cent, Lloyds Banking Group dropping almost 2.5 per cent and Deutsche Bank losing 1.93 per cent.

Now anxiety is building that Europe’s political system will be unable to stop the rot.

Capital Economics’ Ben May said that markets will only be calmed by “a significant increase in the [European bailout] facility’s firepower”. But the region’s paymaster countries have yet to even vote through changes to the bailout fund’s powers, let alone any further increase in its capital.

US markets initially crashed but broke their eight-day falling streak by the close of trading as talk of another round of American quantitative easing circulated. As a result, the dollar lost 1.2 per cent against the euro throughout yesterday. Newedge’s Bill Blain said: “[It] all feels a bit 2008... and you know that didn’t end well. There is doubt and fear in the air.”

Underlining the depth of concern, the Swiss National Bank cut interest rates in a surprise attempt to weaken the Swiss franc, which has surged as investors seeking a “save haven” have fled the dollar and euro.