Eurozone stock markets and the euro got a boost yesterday from German approval for a new firewall, clearing a key hurdle in solving the debt crisis.
In a landmark ruling, Germany’s Constitutional Court overturned a raft of legal challenges aimed at preventing President Joachim Gauck from signing the European Stability Mechanism (ESM) and fiscal pact that will act as a debt brake.
With the €500-billion ESM in place and a beefed-up European Central Bank ready to intervene massively on the markets, the EU’s crisis fighting machinery is taking shape, and elicited positive response on the markets where borrowing costs for weaker eurozone states continued to fall.
For 10-year benchmark government bonds in Spain, widely touted as the next bailout candidate, the return dipped slightly to 5.60 per cent, compared with record unsustainable highs above 7.60 per cent in July.
Ccompared with safe German debt, the extra rate, or risk premium, charged on Spanish bonds fell below four percentage points for the first time since April.
The return on benchmark 10-year Italian government bonds slid to nearly five per cent.
With banking shares buoyed by the decision, Germany’s DAX 30 gained 0.46 per cent to 7,343.53 points, while in Paris the CAC 40 ended up 0.18 per cent at 3,543.79 points. Madrid climbed 0.78 per cent and Milan rallied 1.19 per cent.
However London’s FTSE 100 index of top companies finished down 0.17 per cent at 5,782.08 points, with investors looking to a possible Federal Reserve decision to add further monetary stimulus to the US economy.
“European markets opened mixed but soon rallied as the German Constitutional Court rejected thousands of injunctions from disgruntled opposition to Germany’s participation in the European Stability Mechanism to help smooth the way for the euro area to attempt to contain the debt crisis,” said Joshua Raymond, market strategist at City Index traders.
“The market has reacted well,” said Alexandre Baradez, an analyst at Saxo Banque in Paris. “It was good news in itself, in line with expectations, and the conditions imposed by the judges weren’t too strict.”
In foreign exchange deals, the euro was being traded above $1.29 for the first time for four months, reaching $1.2937 at one point. It later fell back to 1.2901, which compared with $1.2848 in New York late on Tuesday.
US markets were in positive territory, with the Dow Jones Industrial Average up 0.13 per cent to 13,341.23 points in midday trade. The S&P 500-stock index rose 0.17 per cent to 1,436.03 points, while the tech-rich Nasdaq added 0.06 per cent to 3,106.44 points.