Italian Stocks Hit by Libyan Ties; France Next?

Italian stocks faced continued volatility Tuesday amid escalating violence against Libyan protesters who want veteran ruler Muammar Gaddafi to step down.

Sharon Lorimer

Following a sharp sell-off on Monday, technical difficulties caused the Italian stock exchange to halt trade for most of Tuesday. Italian markets reopened late Tuesday afternoon.

“Libya is an important market for Italy and Italy is an important market for Libya, they buy a lot of oil,” Gabriel Stein, director of Lombard Street Research told CNBC.

He warned that the French stock market could face a similar sell-off if the unrest escalates in countries in North Africa with which France has close ties.

“I think you’ll see this in France as well if there are more problems in North Africa,” Stein said.

France's CAC-40 ended down more than 40 points as Europe markets sold off broadly on Tuesday.

Lender UniCredit, in which the Libyan government holds a 7.5 percent stake, is among companies hurt by its connections to the country.

Aerospace and defense company Finmeccanica has also been hit. Tripoli holds a 2 percent stake in the firm and has agreed a joint venture.

Italian oil major Eni has extensive operations in the North African country. Eni has said it plans to invest $25 billion there.

Other Italian firms hit by the Libyan turmoil include Impregilo and Fiat.

“In so far as it affects companies that work in these countries, I think it (the unrest) is quite significant and to dismiss this as irrelevant could turn out to be a big mistake,” Stein said.

Rome’s Libyan Business

James Watson, head of International Relations at the American University in Rome, told CNBC Italy could face a major gas and oil supply problem if violence in Libya escalated further.

“Italy takes a quarter of its supply from Libya so if there’s serious unrest in Libya that could be disastrous," he told CNBC.

Italy's Industry Ministry said on Tuesday there were no problems with natural gas supplies to the country after Eni carried out safety measures for the Greenstream natural gas pipeline with Libya, Reuters reported.

The political turmoil could also spell further trouble for Italian Prime MinisterSilvio Berlusconi.

Berlusconi, whose government has courted the Gaddafi regime for energy contracts and investments, said Saturday he has not called Gaddafi because he did not want to "bother" him during the revolt. He since condemned violence following the widely-criticized faux pas.

“If things go badly in Libya then he will be held responsible,” Watson said. “It’s by no means certain Gaddafi can regain control. He looks as if he is losing control.”

Watson said one possibility for Italian continuity would be if the ruler’s son took over.

“He is not a reformer, but that would maintain Italy’s interests in material terms,” Watson said, adding: “though not in human rights terms”.

- Reuters contributed to this report