Stock markets recovered their poise Thursday after Greece's political leaders finally agreed on a new prime minister and as Italy's borrowing rates eased on speculation the European Central Bank has been busy buying up the country's bonds.
Fears that Italy, the No. 3 economy in Europe, could default on its $2.6 trillion debt had sent stock markets plunging Wednesday as Italy's key borrowing rate spiked way above the 7 percent threshold. Greece, Ireland and Portugal had to eventually seek outside financial help when their borrowing rates rose above that level.
However, speculation that a technocratic government led by economist Mario Monti looks likely to replace Premier Silvio Berlusconi's government has helped soothe market nerves, as has unconfirmed reports the European Central Bank has bought Italian bonds in an effort to get their yields down. Italy's benchmark rate is now down at 6.85 percent, 0.28 percentage point lower on the day.
"While the ECB intervention has proven effective in the short-term ... the question is now whether the ECB can credibly protect yields from breaking again above 7 percent," said Sebastien Galy, an analyst at Societe Generale.
Tensions have also eased on the news that Italy easily sold euro5 billion ($6.8 billion) in 12-month bonds at borrowing rates which were not as bad as expected. Investors asked for an interest rate of 6.087 percent to lend Italy 12-month money.
Though that's up sharply from 3.57 percent in the last such auction last month, it's well below analyst expectations of 7 percent. Demand for the bonds was almost twice the amount on sale.
Italy is under pressure to prove it can push through the reforms needed to convince investors it can repay its debts. The president pledged reforms will be passed soon, likely by Saturday, after which Berlusconi will resign.
"There may be some stability now, but this storm has barely begun," said Louise Cooper, markets analyst at BGC Partners. "Italy's fundamental problems remain."
The calmer tone in Italian bond markets helped most European markets erase early losses, with Milan's main stock market outperforming its European peers, trading 2.1 percent higher. Germany's DAX was up 0.4 percent at 5,854 while the CAC-40 in France was 0.2 percent lower at 3,069. The FTSE 100 of leading British shares was 0.2 percent lower at 5,448.
In the U.S., the Dow Jones industrial average was up 0.8 percent at 11,874 while the broader Standard & Poor's 500 index rose 0.7 percent to 1,237.
The euro was also in demand, trading 0.4 percent higher at $1.3581.
As well as cautiously welcoming developments in Rome, investors have been cheered that Greece's political leaders agreed that former European Central Bank Vice President Lucas Papademos will lead an interim coalition government, that is tasked to secure continued bailout funding and a new euro130 billion ($177 billion) rescue package from eurozone partners and the International Monetary Fund.
The hope is that his experience of global financial circles and his noninvolvement in the partisan politics of Greece will lend themselves to calm jittery markets and steer Greece to a semblance of stability.
Earlier in Asia, Japan's Nikkei 225 index fell 2.9 percent to 8,500.80 _ a five-week closing low _ and Hong Kong's Hang Seng dived 5.3 percent to 18,963.89.
Oil prices tracked equities in Europe higher _ benchmark crude for December delivery was up $1.60 at $97.34 a barrel in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.