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Entire EU Has Become PIIG: Trader

As the crisis in the peripheral area of the euro zone threatened to drag Italy down further on Wednesday, the majority of the region now faces further contagion, Domenico Crapanzano, head of European rates sales and trading managing director at Jefferies & Co, told CNBC Wednesday.

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"The entire EU has become a PIIG now," he said, referring to the grouping of indebted European nations - Portugal, Ireland, Italy and Greece - and claiming that countries accounting for more than 50 percent of European GDP are "not doing so well".

Reports of a crisis summit for European heads of state on Friday, a downgrade of Ireland's debt by Moody's and soaring Italian bond yields all made the market nervous on Wednesday.

While problems in Ireland, Portugal and Greece - all relatively small countries - could be shaken off more easily, the prospect of a crisis in Italy, the world's eighth largest economy, according to 2010 estimates by the World Bank and the International Monetary Fund, has increased nervousness in markets.

Italian and Spanish yields for 10-year bonds went above 6 per cent for the first time since 1997 Tuesday, as the latest Italian bond auction came to a close.

There were no signs that the ECB might buy in, according to Crapanzano, who said that markets are "desperate for someone big to come in."

"Confidence is disappearing and we need proper fundamentals or this is going to get much worse," he warned.

"There's some sense of progress but this is in the balance of EU politicians," Stephen Gallo, head of market analysis at Schneider Foreign Exchange, told CNBC Wednesday.

"I'm not sure if they realise the severity of the situation and the need to come up with an orderly solution."

"The most important thing is dealing with the debt burdens themselves," he said.

"I'm not worried about Italy from a fiscal point, like Greece, Ireland or Portugal, but I am worried about contagion."

The euro zone is awaiting the results of stress tests on 91 major European banks, due on Friday.

There are also worries that Italy is being attacked by short sellers.

Trading in shares in UniCredit , Italy's biggest bank by assets, were suspended Tuesday after its chief executive Federico Ghizzoni said the bank was being hit by speculative short-selling.

Italian exposure to short-selling has actually come down in the past couple of days, according to Will Duff Grodon, research director at Data Explorers.

He believes that because Italian banks are still paying dividends, in contrast to some of their US counterparts, they are "exacerbating the problem".

"For a dispassionate investor sitting in the US, short-selling Italian banks is a good thing," he said.