ECB rescue fund idea lifts euro


The euro jumped and European shares turned higher today after a European Central Bank policymaker said there were reasons to boost the firepower of the euro zone's new bailout fund to tackle the region's deepening debt crisis.

Governing council member Ewald Nowotny said there were arguments for giving Europe's permanent rescue fund a banking licence which would allow it to borrow unlimited ECB money, an idea that the central bank has rejected so far.

Investors have become increasingly worried that the firepower of the new fund would be hugely diminished if, as widely expected, Spain needed a full scale sovereign bailout on top of the rescue deal for its banks.

The euro jumped to $1.2115 on the comments before paring gains to be up 0.2 per cent on the day at $1.2081 and not far from its two-year low of $1.2042 hit yesterday.

Meanwhile European Union officials said that Greece had little hope of meeting the terms of its bailout, casting fresh doubt on its future in the euro zone and keeping any renewed optimism for a quick fix to the crisis in check.

"Overall, risk aversion is set to remain highly elevated as no resolution to the euro zone crisis appears (likely) to come out over the short term," Credit Agricole analysts said in a note to clients.

MSCI's world equity index, which has lost about 2.7 per cent this week as concerns over the impact of Europe's debt crisis on corporate revenues globally have mounted, was down about 0.2 per cent to 303.03 points.

The FTSE Eurofirst index of top European shares which had opened lower for a fourth straight day edged up 0.1 per cent at 1,019.52 points.

Fresh economic data due out later could also depress sentiment with markets expecting a further moderation in the July German IFO business climate index, and looking for UK GDP data to show its third consecutive quarterly contraction.

Spain paid the second highest yield on short-term debt since the birth of the euro at an auction of three- and six-month bills yesterday, indicating difficulties in future debt sales.

Delivering yet more bad news for Europe, Moody's changed the outlook on its provisional top-notch rating for the European bailout fund to negative.

The action was expected given its move earlier in the week to slap a negative outlook on Germany, the Netherlands and Luxembourg.

"Both the Moody's action and the Spanish woes have been known for months, so with the market so short euros, there's a chance of a short-covering bout in the euro," said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ in Tokyo.

Spain's increasingly desperate struggle to put its finances right has seen its borrowing costs soar to levels that are not manageable indefinitely, reflecting a growing belief that it will need a sovereign bailout the euro zone can barely afford.

It has become the recent focus for investors, but Greece - where the sovereign debt crisis began - remains a powder keg. If Athens were to default or exit the euro zone, the knock-on effects could push Spain and even Italy over the edge.

With inspectors from the EU, European Central Bank and International Monetary Fund returning to Greece to decide whether to keep it hooked up to a €130 billion lifeline or let it go bust, three EU officials said they were likely to conclude Athens cannot repay what it owes, making a further debt restructuring necessary.

This time, the European Central Bank and euro zone governments would likely have to take a hit on some of the estimated €200 billion of Greek government debt they own if Athens is to be put back on a sustainable footing.

But there is no willingness among member states or the ECB to take such dramatic action at this stage."Greece is hugely off track," one of the officials told Reuters. "The debt-sustainability analysis will be pretty terrible."

Prime minister Antonis Samaras said Greece's economy could contract by more than 7 per cent this year, pushing debt-cutting targets further out of reach, but he pledged to stay the course.