Paris: Europe may already have passed its biggest stress test.
The euro has rallied 8 per cent from a four-year low last month. Greece, Spain and Portugal have managed to sell 50 billion euros ($64 billion) of debt since May 10, when the need to save the single currency forced finance ministers to create a nearly $1 trillion rescue fund and European Central Bank President Jean-Claude Trichet to begin buying bonds.
"The market seems to be much more convinced following the bailout that the euro zone is working and the peripheral countries will be able to finance their debt," said Christoph Kind, head of asset allocation at Frankfurt-Trust, which manages $17 billion. "This goes hand-in-hand with the appreciation of the euro against the dollar."
Data released yesterday show growth in Europe's services and manufacturing industries unexpectedly accelerated in July as concern over the debt crisis eased. The next stage in the European Union's effort to show the euro can withstand the fallout from the Greek-led turmoil comes today when officials publish results of bank stress tests. EU regulators are relying on the exams to reassure investors about the health of financial institutions from Germany's WestLB AG to Spanish savings banks.
"Sovereign and bank risks had become interwoven in markets' eyes, and the stress tests will go some way toward alleviating fears that weakness in banks is going to undermine sovereigns," said David Page, an economist at Investec Securities in London.
A composite index based on a survey of euro-area purchasing managers in both industries increased to 56.7 from 56 in June, London-based Markit Economics said yesterday. Economists had projected a drop to 55.5, the median of 18 estimates in a Bloomberg survey showed. A reading above 50 indicates expansion.
The cost of insuring against losses on bonds issued by Europe's banks and insurers fell to the lowest in a week on Wednesday on expectation of successful stress tests.
The tests are a "crucial reality check", said Marco Annunziata, chief economist at UniCredit Group in London. If they prompt a negative market reaction, the ECB may face greater demand for liquidity from banks and have to extend the timeframe it lends unlimited amounts of cash to six or even 12 months, potentially delaying interest rate increases, he said.
Regaining confidence
The extra costs investors demand to buy Spanish and Portuguese bonds instead of comparable German securities declined after debt sales this week and those spreads have narrowed 24 per cent and 19 per cent respectively from euro-era highs in May. The cost of insuring against sovereign default has also slid and the Frankfurt-based ECB last week bought the lowest amount of bonds since its asset-purchase programme began.
"The recent evolutions on the markets show we are in the process of winning back the confidence that we've lost, but the path will be long," German Finance Minister Wolfgang Schaeuble said on Wednesday in Paris.
Demand for funding from the high-deficit nations will also ease. Spain is poised to pay off 24.7 billion euros in bonds and bills in July, the stiffest monthly redemptions remaining this year, and doesn't face another bond maturity until July 2011. Portugal doesn't have bonds maturing until April and Ireland has said it is fully funded until the second quarter of 2011.
