Markets breathe big sigh of relief on Greek hopes

AP News
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Posted: Jul 21, 2011 11:47 AM
Markets breathe big sigh of relief on Greek hopes

Stocks and the euro surged Thursday as investors cheered draft details of a new bailout for Greece that will hopefully dramatically reduce its massive debts and prevent other countries such as Italy and Spain being dragged into the crisis.

Traders had been very cautious earlier in the day and the euro was under severe pressure, dropping as low as $1.4132, as it looked increasingly likely that Greece's second bailout package in a little over a year would make it the first eurozone country to default on its debts.

But once a draft of the rescue package was leaked, investors appeared to be heartened to simply know that there was a plan, that eurozone policymakers were finally grappling with the big issue _ that Greece doesn't just need loans to cover its day-to-day payments but also needs a way out from under a mountain of debt.

The proposals will still likely mean Greece gets slapped with a selective default rating from the credit rating agencies, as private holders of Greek bonds will be asked to accept a later payment. That rating is given when a debtor asks for an extension on a loan or refuses to pay back the full amount plus interest.

By late afternoon in Europe, markets seemed to have already accepted that there would be a default and were focused on news that the plan would reduce Greece's debt more substantially than expected.

The FTSE index of Britain's leading shares closed up 0.8 percent at 5,899.89, while France's CAC-40 spiked 1.7 percent to 3,816.75. Germany's DAX rallied 1 percent to 7,290.14.

U.S. stocks joined in the euphoria _ the Dow Jones industrial average was up 1.1 percent at 12,708 while the broader Standard & Poor's 500 index rose 1.2 percent to 1,341.

The euro also surged, and was trading at $1.4375, up 0.8 percent on the day.

Analysts warned, however, that the rally may not prove sustainable.

"Knee-jerk market reaction is positive, but the latest plans are no silver bullet," said Neil MacKinnon, global macro strategist at VTB Capital. "Market cynics will not be convinced that debt contagion and the threat of systemic bank risk will be fully resolved by today's summit."

Many have said that while leaders dithered over Greece, the real fear switched to Spain and Italy _ which have seen their borrowing costs skyrocket in recent weeks as investors increasingly viewed them as bad risks. A bailout for Rome or Madrid would bankrupt the EU.

After the details of the plan emerged, though, Greece, Italy and Spain all saw their yields _ the amount of interest demanded by investors to lend them money _ plummet.

Later today, the U.S. markets will be looking to see if President Barack Obama and congressional leaders can ink a deal to raise the U.S. debt ceiling, the amount of debt the government can accumulate. There has been some progress in recent days, but it's not clear what the final plan will look like. One has to be agreed by Aug. 2, or the U.S. will run out of money.

Earlier, Asian shares moved lower after China's manufacturing contracted.

Japan's Nikkei 225 closed up less than 0.1 percent at 10,010.3 after spending most of the day in negative territory. China's Shanghai Composite Index lost 1 percent to 2,765.89 while Hong Kong's Hang Seng closed down 0.1 percent at 21,987.2.

China's stocks were hurt by a report Thursday that Chinese manufacturing activity fell to a 28-month low in July following repeated rate hikes and other measures to cool an overheated economy. HSBC Corp.'s manufacturing index fell to 47.2 from June's 50.1 on a 100-point scale on which numbers below 50 show activity declining.

After the International Energy Agency said it wouldn't release any more stockpiles, oil rebounded strongly. Benchmark oil for August delivery was up $1.33 at $97.73 a barrel in electronic trading on the New York Mercantile Exchange.