European markets stabilized on Tuesday following the previous session’s big losses amid speculation China would lend a hand to Italy by purchasing its bonds.

There are worries Greece could default on its debt, but investors are already looking at the next potential domino in Italy.

The iShares MSCI Italy Index (NYSEArca: EWI) lost about 2% on Monday as concerns over Italy’s debt weighed on markets. French banks are also feeling the pressure as a result of the heightened possibility of a Greek default, and the growing trouble in Italy. [Germany, Italy ETFs Lose a Third of Their Value on Debt Woes]

“For the German and French banks, the worry could be over Italy’s debt, which represents the lion’s share of their [sovereign debt]holdings,” said Mike Lenhoff, chief strategist in London for investment manager Brewin Dolphin, in a Globe and Mail report. [Europe ETFs Sink on Debt Fears]

As the reality of a Greek default looms, analysts are looking at Italy, which could become a bigger threat in Europe’s growing debt problem. Italy’s borrowing costs rose as investors demanded higher yields in a bond auction Tuesday.  [Italy ETF Wrestles with Austerity Measures]

“It is unfortunate that the Italian auction is taking place when the market is in panic mode,” Fabrizio Fiorini, the head of fixed income at Aletti Gestielle SGR SpA in Milan, said on Bloomberg. ” Borrowing costs are likely to remain at elevated levels. The rise in Italian yields is manifestation of a lack of market confidence in European leaders’ ability to tackle the problem.”

Showing Page 1 of 2