The widening political crisis in Italy sent stock prices falling around the world Tuesday, with the Dow Jones industrial average losing 1.8 percent of its value.
European bank stocks were among the hardest hit, with Italy’s Unicredit and Spain’s Santander down by more than 5 percent, but U.S. banks were also hit.
As stocks plunged, investors poured money into safe havens. U.S. Treasury yields saw their biggest one-day drop in two years and the dollar gained ground against the euro.
The sell-off came after Italian President Sergio Mattarella vetoed the choice of a finance minister who has sometimes been critical of Italy’s membership in the eurozone.
The president’s move stymied efforts by two populist political parties to form a government and made it more likely that elections will have to be held in coming months.
Although the two parties say they are not considering a departure from the eurozone, the mere suggestion of such a move has scared investors. The country represents the third-largest economy in the eurozone and also has substantial debt, much of it held by foreign banks.
A departure would send ripples throughout the global economy and would also raise questions about the future of globalism, much as Britain’s departure from the European Union did.
“There’s an existential threat hanging over the single currency if we head into more elections this summer. I don’t know how we get away from that now, given the scale of the financial implications,” Kit Juckes, chief foreign exchange strategist at Societe Generale, told the Wall Street Journal.
In an unusual address, the governor of Italy’s central bank, Ignazio Visco, warned about the consequences of such a move.
“We must never forget that we are only ever a few short steps away from the very serious risk of losing the irreplaceable asset of trust,” he said.
“Italy’s destiny is that of Europe. We are part of a very large and deeply integrated economic area, whose development determines that of Italy and at the same time depends on it,” he said.