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Italy's crisis `may destabilise finance'

Italy risks financial disarray if a solution is not found quickly to the country's political crisis, Luigi Abete the chairman of Confindustria, Italy's CBI, warned yesterday, while the lira fell to a new low of 1,066 to the mark as markets waited impatiently for the outcome of President Scalfaro's continuing efforts to end the crisis.

Demand for marks and Swiss francs also maintained the pressure on the peseta, which traded at 87.35 to the mark, but bonds and share prices closed slightly higher in both Milan and Madrid.

Claims by the governor of the Bank of France, Jean-Claude Trichet, that the European Exchange Rate System is not under pressure failed to reassure markets. The dollar also came under further pressure, following remarks from a former governor of the Federal Reserve that the authorities are now unsure whether to raise interest rates by 0.5 or 0.75 per cent.

The flight of money from emerging markets continued with sharp falls in currencies and shares in several centres. The Thai baht was worst hit on currency markets, while share prices fell heavily in Taiwan, Thailand, Singapore and Malaysia.

Shares and currencies stood up rather better in more developed markets including Hong Kong and Korea, but the Hong Kong Monetary Authority appeared to be supporting the local currency, and fund managers were said to be reviewing their positions in currencies linked to the US dollar.

Volkswagen yesterday closed its vehicle factory in Mexico for a week, anticipating a slump in demand as Mexico is forced to tighten its belt in response to the economic crisis which has led to a 40 per cent fall in the value of the peso in the past month. The shutdown is the first tangible sign of the anticipated severe recession Mexico faces as a result of the crisis and the austerity package introduced last month in an attempt to halt the slide in the currency.