EU Bond Comments Boost European Shares

Markets Reuters

European shares and the euro rose on Wednesday after the head of the European Commission said it would soon present options for the introduction of euro area bonds, a development investors saw as positive despite German opposition to the idea.

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The comments from Jose Manuel Barroso helped reverse earlier losses for the single currency and European stocks triggered by the downgrade of two big French banks' credit ratings. U.S. stock futures pointed to a mixed start on Wall Street.

Common euro zone sovereign bonds are perceived to be part of a solution as they would give weak euro zone states renewed access to funding in commercial markets.

Barroso's words repeat an earlier pledge from EU officials to make such proposals in October, while Germany, without whose approval the scheme cannot be introduced, remains strongly opposed to the issuance of common euro zone bonds.

Global markets have been roiled since the end of July by the twin fears of a recession in the United States and Europe's protracted debt woes, which have forced Greece, Ireland and Portugal to take bailouts and piled bond market pressure on Italy and Spain.

The crisis has the potential to derail global growth. French President Nicolas Sarkozy and German Chancellor Angela Merkel are due to talk with Greek Prime Minister George Papandreou on Wednesday, with investors concerned by a lack of decisive action and increased chances Athens will soon default.

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"It (common bonds) could be a turning point and a major step forward as countries with higher debt levels will have the ability again to finance themselves," said Klaus Wiener, chief economist at Generali Investments, which manages 330 billion euros ($450 billion).

"But if we get euro bonds, there will be some strings attached. There will be strong governance in terms of fiscal prudence, otherwise it can not work."

The FTSEurofirst 300 index was up 1 percent, although the index is down nearly 19 percent so far this year. Banks also pared losses, with the European sector index up 0.7 percent. But Societe Generale was down 3.3 percent and BNP Paribas down 1.7 percent.

Wall Street was set for a mixed opening. S&P 500 futures were up 0.3 percent, the Dow Jones down 0.3 percent while the Nasdaq 100 was 0.2 percent higher.

DEFAULT, DOWNGRADES

Earlier, investors cut exposure to riskier assets after Moody's Investors Service cut its ratings for French banks Credit Agricole and Societe Generale on Wednesday, citing their exposure to Greece.

Confidence in the euro zone was further hit on Tuesday when Italy, where lawmakers are due to vote on an austerity package at 1800 GMT, was forced to pay the highest interest rates since joining the euro in 1999 to sell 5-year bonds.

Italy is a particular concern because, while Europe's bailout fund can cope with rescuing smaller, peripheral nations, it lacks the financial firepower to save the euro zone's third largest economy.

The euro was up 0.3 percent at $1.3720 against the dollar, climbing from around $1.3630 before the comments from Barroso.

"The market may get comfort from those kind of comments but overall the picture is increasingly negative and appetite from foreign investors for euro zone assets seems to be waning," said Ian Stannard, head of European currency strategy at Morgan Stanley.

German government bonds pared gains while the cost of insuring Italian and Spanish debt against default also fell. But Greek two-year government bond yields marched relentlessly higher, rising 3.3 percentage points to approach 95 percent.

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