US markets soar on EU bailout 'fund of €2trn'
Expansion of the EFSF fund is awaited but Germany seen as big obstacle to such a move
Published 19/10/2011 | 05:00
MARKETS surged last night on optimism that European authorities may increase the European rescue fund up to €2 trillion.
A report in the 'Guardian' suggested that France and Germany were prepared to take a bold radical step to bolster the fund. US markets closed up on the report, with financial shares particularly strong.
The euro strengthened 0.3pc to $1.3775 on reports that a key summit this Sunday will deliver tangible progress. But other sources last night were sceptical that a boost to the fund is on the cards.
Germany in particular is seen as a big obstacle to such a step and there are concerns over France's ability to retain its AAA rating if it is forced to guarantee even larger sums.
A spokesman for Chancellor Angela Merkel refused to comment, but did concede that both sides were involved in "intensive'' talks on the issue of the European Financial Stability Facility (EFSF).
US markets in particular were buoyed by the suggestion of a fund increase, although Dow Jones, read by many US traders, dismissed the 'Guardian' report.
One trader said: "There's a realisation that at some stage this thing is going to turn. We know that they will come up with a deal in Europe, but the issue is if that deal will do the economy any good."
News that France could lose its AAA debt rating was the big driver earlier in markets.
The news deals a further blow to hopes that France and Germany would have a fully fleshed out "game saving" deal to rescue the euro area ready for a European leaders summit due to take place on Sunday.
French borrowing capacity is a crucial weapon in the European arsenal for fighting the crisis.
Rating agency Moody's warned the French government finances are among the weakest of any AAA rated country.
Moody's did not downgrade the France debt rating, but the risk of a cut was enough to drive up borrowing costs and batter stock markets across Europe yesterday.
France could be downgraded in early 2012, Moody's said.
The news sent shares lower and drove up borrowing costs. l Spain's government bond ratings were cut two levels to A1 by Moody's last night. The country's ratings were also given a negative outlook. Moody's said Spain continued to be vulnerable to market stress. Since ratings were placed under review in late July, "no credible resolution of the current sovereign debt crisis has emerged."
Moody's now sees Spain's real GDP growth in 2012 of 1pc at best, against an earlier 1.8pc.