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European markets tumble as investors fear Italian default

Investors in Europe have set their sights on Italy, speculating that if a Greek bailout isn't approved and Athens defaults on its government debt, Italy is next.

By Staff writer / July 12, 2011

In this April 26 file photo, Italian Premier Silvio Berlusconi waits for French President Nicolas Sarkozy, prior to their meeting at Rome's Villa Madama.

Gregorio Borgia/AP/File

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Paris

European stocks fell sharply Tuesday amid larger worries about European resolve on a Greek bailout and speculation that Italy is edging toward default.

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Italy's cost of borrowing has soared this week and yields on the government's benchmark 10-year bonds rose to a euro-era record earlier today. Markets in London, Paris, Madrid, and Milan fell sharply in morning trading.

Italian Finance Minister Giulio Tremonti today chairs an emergency session to cut $56 billion from the budget, an austerity measure designed to reassure markets.

The session follows separate meetings on Italy and Greece in Brussels yesterday by the highest-ranking EU officials responsible for government and banking.

Analysts say it is not the Greek crisis per se, but the lack of an agreed EU rescue and concomitant political resolve, that troubles markets and is focusing attention on Italy’s position.

Jacques Cailloux, chief European economist for the Royal Bank of Scotland, said Monday that the Italian crisis represents “a new phase” in the financial crisis of Europe, and warned against a “domino effect.”

Yields on Italian bonds leaped from 5.2 percent yesterday morning to near 6 percent today -- drawing comparison to a similar spike last November in Ireland, a substantially smaller market. Safer German 10-year bonds -- the eurozone benchmark -- are yielding under 3 percent. The 300 basis-point difference, or spread, between the two reflects investor fears over the greater likelihood of an Italian default.

Germany's Chancellor Angela Merkel phoned Italy's Prime Minister Silvio Berlusconi on Sunday to urge passage of the austerity plan, something he's resisted until now.

The EU meeting on Italy yesterday took place with little advance warning. European officials declined to call it a “crisis” meeting, though it was set in the wake of sharp stock falls in Italy Friday. The EU officials had gathered to discuss a second Greek bailout following a $150 billion package promised last year.

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