European stock markets closed sharply higher yesterday in a bounce after recent heavy losses, getting a boost as Italy and Greece made progress on reforms to help stabilise their strained finances.
Dealers said the gains reflected investor relief that finally Italy and Greece were coming through on the measures demanded of them to ease the eurozone debt crisis.
At the same time, strong doubts remained whether Italy and Greece can ultimately pay down or reduce their debt mountains without more turmoil in the eurozone where growth appears to have come to a virtual halt.
The European Commission warned on Thursday that the EU economy could fall back into recession early next year due to a “vicious circle” of government debt, vulnerable banks and weak spending.
In the absence of growth, it will prove virtually impossible to reduce the debt driving the current crisis, meaning governments will have no choice but to cut spending and hike taxes further, a toxic mix for the economic outlook.
In London, the FTSE-100 index of top companies closed up 1.85 per cent to 5,545.38 points, in Paris the CAC-40 jumped 2.76 per cent to 3,149.38 points and in Frankfurt the DAX 30 gained 3.22 per cent to 6,057.03 points.
Milan advanced 3.68 per cent and Madrid put on 2.95 per cent.
The euro rose to $1.3767 from $1.3599 in New York late on Thursday while the dollar fell to 77.10 yen from 77.63 yen.
“Equity markets are seemingly looking a little more kindly on Europe as we head into the weekend break with news of (Italy Prime Minister Silvio) Berlusconi’s accelerated departure,” said IG Markets trader Peter Stanhope. This was “combined with progress from Greece over the formation of a coalition government, helping cheer stocks on a global basis,” he added.
Reflecting the easing of tensions, Italian borrowing costs fell sharply, with the benchmark 10-year government bond yielding 6.659 per cent, holding below the danger level of seven per cent seen at the height of the government crisis this week.
Interest rates of about seven per cent are widely considered to be too high for Italy to finance its public deficit and carry its debt for the long term.
Mr Berlusconi has promised to step down once a package of reforms receives final approval from Parliament.
In Berlin, the head of the eurozone crisis fund called on Italy to act swiftly to reassure markets about its financial and political stability, in an interview in several European newspapers yesterday.
“Italy doesn’t have much time to reassure the markets,” said Klaus Regling, head of the European Financial Stability Facility, according to the Suddeutsche Zeitung newspaper.
“The country needs a functioning government as soon as possible,” he said, adding that the fund was ready to help Italy immediately if it was asked.