Fitch warns of ‘cataclysmic’ euro collapse

British and European markets fell back as the European Central Bank (ECB) was warned by ratings agency Fitch that the single currency could face meltdown unless Italian debt is reined in quickly.

The benchmark UK index of blue-chip shares fell 0.45%, or 26 points, to 5,671 and the Mid-250 index crept up 0.24%, or 25 points, to 10,373.

UK energy companies also fell following EDF’s announcement that it would cut gas prices by 5%. SSE (SSE.L) lost 37p, or 2.8%, to £12.64 and Centrica (CNA.L) shed 3.7p, or 1.3%, to 284p as profits could be squeezed when the firm is forced to trim its prices.

See the FTSE's performance and the index’s top winners and losers.

ECB could face ‘cataclysmic’ euro collapse

Ratings agency Fitch warned the ECB on Wednesday afternoon that it could face a ‘cataclysmic’ collapse of the euro if Italy doesn’t find a solution to its mounting public debt problems.

David Riley, head of sovereign ratings at Fitch, gave the stern warning as the agency may downgrade Italy in the coming weeks, following its decision not to cut France’s credit rating on Tuesday.

Italian and Spanish bond auctions will be closely watched on Thursday as the yield on Italian 10-year bonds closed above the perceived breaking point of 7.04%, and the yield on Spanish 10-year bonds ended Wednesday trade at 5.34%.

Eurozone stock markets also suffered losses on concerns about the region's stability: Germany’s DAX index lost 0.17% to 6,152, France's CAC 40 index shed 0.19% to 3,205, and the FTSEurofirst 300 index of top European shares fell 0.69% to 1,020.

The ECB’s actions came under further scrutiny as questions are being raised about whether the half a trillion euro issued to European banks last December has provided real support for the region’s economy. 

Angus Campbell, head of sales at Capital Spreads, said: ‘Markets reversed much of their gains from yesterday on concerns that European banks are hoarding cash as opposed to lending it, which could cause another credit crunch, locking up money markets as they did back in 2007. 

‘Following the ECB mass injection of cash last month banks have kept the money as cash to prop up their balance sheets rather than lending it for possible greater returns, in case they never see it again. The effect could lead to a freezing of the credit markets which will do nothing to help the eurozone which is likely currently in a recession.’