Euro rescue deal gets modest support in markets

AP News
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Posted: Dec 09, 2011 9:00 AM
Euro rescue deal gets modest support in markets

A deal to get almost all EU countries to tie their economies closer together received some support in the markets on Friday, even though European leaders failed to reach unanimity on the plan, with Britain opposing the plan.

Following the summit, German Chancellor Angela Merkel confirmed Britain was the only country in the 27-nation European Union to hold out against supporting the new treaty.

The new treaty will penalize overspending governments in a bid to avoid a repeat of Europe's debt crisis. Germany and France, the two biggest economies in the 17-nation eurozone, had hoped to persuade the whole European Union to back a change to the current EU treaty. Britain's refusal means they will have to settle for a new intergovernmental agreement instead.

Following losses in Asia and an early retreat in Europe, market sentiment improved somewhat.

"The principle of a strong commitment to a new 'fiscal compact' _ tough discipline and sanctions in case rules are breached _ and stronger coordination of economic policies has been established," said Herve Goulletquer, an analyst at Credit Agricole. "This is a significant step forward. What markets want now is to be sure that it will work. The devil is too often in the detail."

In Europe, Germany's DAX was up 0.8 percent at 5,922 while the CAC-40 in France rose 1.2 percent to 3,133. The FTSE 100 index of leading British shares was 0.2 percent higher at 5,496. The euro was also flat at $1.3354.

Wall Street was poised for gains at the open, too _ Dow futures were up 0.5 percent at 12,009 while the broader Standard & Poor's 500 futures rose 0.6 percent to 1,238.

Investors will be careful not to get too carried away. After all, previous European agreements to stem the crippling debt crisis had been greeted with euphoria only for market sentiment to turn sour again.

"An all-mighty sell-off in the markets is brewing," said Nicholas Spiro of Spiro Sovereign Strategy. "EU leaders have patently failed to deal with the issue that investors care most about: shoring up eurozone sovereign debt."

Many think a solution to the debt crisis can only come if the European Central Bank takes a more active role, possibly by buying up more government debt in the markets. It currently buys bonds in the markets, but only reluctantly, and in small quantities.

On Thursday, the European Central Bank's president Mario Draghi suggested he had no intention of increasing bond purchases after the bank delivered on market expectations to reduce its main interest rate by a quarter percentage point to 1 percent.

Draghi said he was surprised by some interpretations of his comments last week that "additional steps" would be taken if the 17 countries that use the euro agreed to closer budget controls. Germany and France have proposed a plan on closer fiscal unity that will dominate debate at the EU summit of leaders, which starts later Thursday.

Earlier in Asia, stocks had been weighed down by an early cautious response to the deal.

Japan's Nikkei 225 fell 1.5 percent to close at 8,536.46 while South Korea's Kospi sank 2 percent to close at 1,874.75. Hong Kong's Hang Seng tumbled 2.7 percent to end at 18,586.23.

Mainland Chinese shares fell less than other Asian markets after inflation data for November fell to a less-than-expected 4.2 percent. The benchmark Shanghai Composite Index retreated 0.6 percent to close at 2,315.27, while the Shenzhen Composite Index lost 0.9 percent to finish at 961.81.

Oil prices were fairly subdued _ benchmark oil for January delivery rose 1 cent to $98.35 a barrel in electronic trading on the New York Mercantile Exchange.

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Kelvin Chan contributed from Hong Kong.