European stocks rise on hopes for Greece deal

AP News
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Posted: May 31, 2011 12:05 PM
European stocks rise on hopes for Greece deal

European stocks rose Tuesday on hopes that a new aid deal was taking shape to keep Greece from defaulting on its debts, and as falling unemployment in Germany underlined the strength of the eurozone's largest economy.

The German DAX 30 blue chip index closed up 1.8 percent at 7,287.91 while Britain's FTSE 100 rose 0.8 percent to 5,988.84 after being closed on Monday for a bank holiday. France's CAC 40 traded 1.5 percent higher at 4,002.93.

U.S. stocks were still holding onto gains despite a surprise drop in consumer confidence. The Dow traded up .5 percent a 12,509.36 in the early afternoon New York time while S&P 500 rose 0.5 percent to 1,338.30.

EU officials offered few details about what were described as heated talks, but markets digested a preliminary view as sketched out by top European Central Bank official Lorenzo Bini Smaghi. He has indicated Greece may need euro60-70 billion in new funding, and that half of that could come from measures such as privatization and getting Greek banks to roll over current government bond holdings. The other half would be additional loans from the eurozone countries and the International Monetary Fund.

A deal would not solve Greece's deeper economic problems but would at least remove fears of an imminent default stoked last week by news the IMF would withhold further loans unless the country's financing is secured for a full year ahead.

Greece, currently propped up by last year's euro110 billion package of EU-IMF emergency loans, was expected to return to financing itself on bond markets next year. That now appears unlikely as its economy continues to deteriorate, and the country now needs a second shot of money to pay its debts.

The eurozone's part of the new assistance, some euro20 billion, would still need approval from member countries. Greek banks, however, could probably be pursuaded to renew their holdings of expiring Greek bonds since a default or restructuring could inflict serious losses on their balance sheets.

"While this might be a big ask for foreign debtors, it is much easier to see Greek banks accepting such a deal," said RBS economist Jacques Cailloux.

Such a voluntary rollover would not change bond terms and so would not be considered a default or involuntary stretchout of payments, prospects adamantly opposed by the European Central Bank. The ECB says it could lead to market turmoil and damage the Greek and European banking system.

Germany, by contrast, continued its strong economic performance by reporting a jobless rate of 7.0 percent in May, down from 7.3 percent the month before. The country is enjoying strong growth led by exports and investment in new machinery and equipment. Eurozone inflation, meanwhile, eased slightly in May.

The euro strengthened Tuesday to $1.4374, up 0.6 percent on the day.

In Asia, Japan's Nikkei 225 stock average rose 2 percent to close at 9,693.73. Industrial output rose a modest 1 percent in April after a record 15.5 percent drop in March, when the country's economy was slammed by supply disruptions in the wake of the twin disasters. But the government also said factory output _ a key barometer of Japan's economic health _ will pick up speed in the coming months.

Mainland Chinese shares snapped an eight-session losing streak as the Chinese yuan closed at a record high level of 6.4845 to the U.S. dollar, drawing investors hoping to gain from the Chinese currency's gradual appreciation.

Benchmark oil for July delivery was up $2.09 to $102.68 a barrel in electronic trading on the New York Mercantile Exchange. The contract last settled up 36 cents at $100.59 on Friday. Markets in the U.S. were closed Monday for the Memorial Day holiday.

The dollar rose to 81.24 yen, up 0.4 percent on the day.

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Kelvin Chan in Hong Kong and Fu Ting in Shanghai contributed to this report.