Markets shrug off mixed signals as hopes of euro rescue deal spark rally

 

Stock markets bounced on hopes that European policymakers would finally tackle the debt crisis with decisive action yesterday, although the results of an Italian bond auction showed that nervousness continued to linger in the background.

Rome faced sharply higher interest rates when it tried to borrow money, its first attempt to tap the wholesale markets since its credit rating was downgraded by Standard & Poor's last week. The country sold €8bn in six month Treasury bills, with the yields climbing to 3.071 per cent, the highest since September 2008. A two-year Italian bond saw yields rise to their highest since July 2008, ahead of an auction of longer term debt later this week. Spain also faced higher costs when it sold short term debt yesterday, though it paid less than Italy.

But stock markets latched on to hopes that the European Financial Stability Facility could be leveraged to boost the eurozone's ability to contain the crisis. Although some member states – most notably Germany, where legislators have their say tomorrow – still need to ratify the changes to the EFSF agreed as part of the second Greek bailout in July, traders zeroed in on reports that officials were already working on ways to boost the bailout fund by leveraging it, something that the US Treasury Secretary Tim Geithner is believed to have called for in meetings with EU finance ministers earlier this month. The enthusiasm for the idea was such that the FTSE 100 rose by 4 per cent, its best daily performance this year, and the German stock market gained 5 per cent despite mixed signals from politicians. On the one hand, the Austrian finance minister Maria Fekter indicated that leveraging could be discussed as early as next week. But on the other, the German finance minister Wolfgang Schäuble, when asked about the EFSF, insisted: "We do not intend to increase it."

The French finance minister François Baroin was more diplomatic, highlighting tactical considerations on Monday night. "It is out of the question to put forward, three days from the Bundestag vote [on Thursday], the issue of whether we should increase the fund... Let's not open Pandora's box on something that is a red flag for Germany," he said.

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