Europe close: Shares slide as Italy challenges Brussels

Italy's governing coalition threw down the gauntlet to Brussels on budget austerity, sending shares across the Continent lower.

Unsurprisingly, Italian government debt fell back sharply following the announcement, although for the time being the risk of contagion appeared to be contained, with investors in Spanish or Portuguese sovereign debt apparently calm.

Overnight, Italian officials announced a public deficit-to-GDP target of 2.4% for 2019, versus the between 1.6% to 2.0% target which Tria had argued for and the prior government's original target of 0.8%.

According to some economists, that target marked a "significant deviation" from European Union rules, while others said it may foreshadow the imminent departure of the country's economy minister, Giovanni Tria, which had argued for restraint, although there were also reports to the contrary.

By the end of trading, the benchmark Stoxx 600 was lower by 0.83% or 3.21 points at 383.17, alongside a drop of 1.52% or 188.86 points to 12,246.73 for the German Dax.

But the focus was without the doubt the FTSE Mibtel, which had slumped 3.72% or 799.37 points to 20,711.70.

In parallel, the yield on the benchmark 10-year Italian government note was 26 basis points higher to 3.15%, having hit an intra-session high of 3.26%, even as that on German bunds dropped by six points to 0.47% as investors sought out safe havens.

Yields on similarly-dated Portuguese and Spanish debt on the other hand were little changed, at up by just one basis point to 1.88% and down by one point to 1.50%, respectively.

According to one of Italy's deputy prime ministers, Matteo Salvini, "the markets will have to deal with it", ANSA reported, saying that the 2019 budget was a "step towards civilisation".

Luigi di Maio, the head of the Five Star Movement, and the other deputy PM, sounded more conciliatory after having been the chief proponent of a higher deficit.

Sector-wise, lenders' shares were getting pumeled, with the corresponding Stoxx 600 sector gauge having retreated 2.76% to 156.78.

Italian banks' shares bore the brunt of investors' disappointment, with those of Banca Generali down by 7.17%, Banco Bpm retreating 9.43%, Bper Banca off by 8.34%, Intesa Sanpaolo down 8.% and Unicredit sliding 6.73%.

Commenting on the market action, Professor Costas Milas at Liverpool University's Management School said there was scope for the "the Italian virus" to spread to other EU countries, especially France and Portugal due to the exposure of their banks to Italian government debt.

In the case of France, lenders' exposure to private and public debt from Italy was a "quite high" 10.25%, followed by Portuguese lenders at 7.81%, Milas explained.

Spanish banks' exposure was much lower, he said, at 4.65%, while British and Irish banks were well immunised to Italy, at 1.28% and 0.82%.

Citi economists, who were betting on Italy going non-confrontational, said: "With rating agency decisions pending, we can't exclude that Italy might soon switch back into 'the worst-case scenario'."

Acting as a backdrop, Eurozone CPI surprised to the downside.

Eurostat reported that 'core' consumer prices in the single currency bloc fell from a 1.0% year-on-year pace in August to 0.9% (consensus: 1.1%).