Banks propel European shares to 18-month closing high

European equities ended at their highest level in nearly 18 months yesterday, boosted by banking shares, as hopes for a solution for Greece's fiscal problems and soothing US economic figures improved sentiment.

A pledge by Dubai's government to support the restructuring of debt-laden state-owned firms Dubai World and Nakheel by providing $9.5 billion in new funding also provided some relief.

The FTSEurofirst 300 index of top European shares finished one per cent higher at 1,083.34 points, the highest close since early October 2008. The index is up 3.6 per cent this year and has jumped 67 per cent since hitting a record low in March last year.

Financial stocks were among the top gainers, with STOXX Europe 600 banking index rising 1.9 per cent. Standard Chartered, HSBC, Barclays, Lloyds, BNP Paribas, Société Générale, Credit Agricole and Bank of Ireland rose 1.1 to 6.5 per cent.

Royal Bank of Scotland rose 2.5 per cent. The bank unveiled a plan to restructure up to £15.8 billion (€17.6170 billion) of debt in a balance sheet overhaul that will generate a £1.25 billion gain for the bailed-out bank.

Across Europe, Germany's DAX rose 1.6 per cent, France's CAC 40 was up 1.3 per cent, while Britain's FTSE 100 index ended 0.9 per cent higher.

The leaders of Germany and France clinched agreement on a joint European-IMF financial safety net for debt-stricken Greece just before an EU summit on Thursday, the French president's office said.

The accord, which set the stage for a wider deal among eurozone leaders, is intended to reassure nervous financial markets and arrest a crippling rise in Greece's borrowing costs after a debt crisis that has shaken confidence in the euro.

"We need to find a solution (for Greece), which is not only viable for the short run but also viable for the medium- and longer-term," said Klaus Wiener, head of research at Generali Investments.

"We learnt from Lehman Brothers that the cost of cleaning up the mess after such an event is much higher than the cost of finding a solution," he added, referring to the collapse of the US investment bank.

The European stock market was also supported by data showing the number of US workers filing new applications for unemployment insurance fell sharply last week, boosting hopes of a recovery in the labour market.

Investor appetite for risky assets such as equities rose, with the VDAX-NEW volatility index falling 2.7 per cent. The lower the index, which is based on sell and buy options on Frankfurt's top-30 stocks, the higher the market's desire to take risk.

"With the index (FTSE) now pushing beyond a 21-month high, traders will be looking to call this latest rally's peak and we may see a slowdown, if not a sell-off, in the short-term," said Philip Gillett, a sales trader at IG Index.