European markets volatile on debt crisis solution

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European stock markets were volatile Monday amid scepticism the region's leaders will be able to come up with a solution to the eurozone crisis as promised this week.

After initially opening higher on hopes a solution may be reached by Wednesday, some European stock markets veered back into the red at midday as that early confidence evaporated.

Frankfurt's DAX 30 showed a loss of 0.30 percent and the CAC 40 in Paris slipped 0.15 percent, while London's benchmark FTSE 100 index was showing a slight gain of 0.14 percent.

In Athens, the losses were much heavier with prices plunging by more than 5.0 percent, pulled down by falls in the banking sector after the EU summit sent clear signals that private investors would take a heavier hit on Greek debt.

Sentiment took a hit from a further sharp fall in the Purchasing Manager's Index -- a closely-watched survey of private-sector activity -- fuelling fears of a looming recession in the 17 countries that share the euro.

Analysts were also disappointed by the lack of concrete results from a meeting of EU leaders in Brussels on Sunday.

ING Belgium economist Carsten Brzeski bemoaned that "no new fact, no new conclusion" came out of the summit and analysts at Barclays Capital saw "not even a partial" step forward.

On Sunday, European leaders including French President Nicolas Sarkozy, and IMF chief Christine Lagarde, tried to put a positive spin on talks, insisting "good progress" had been made on the debt crisis that has threatened the world economy.

But markets appeared to be frustrated because they are having to wait until a second summit on Wednesday for the exact details to be announced.

French Finance Minister Francois Baroin speaking early Monday, said he was sure a comprehensive deal to end the eurozone debt crisis would be agreed by Wednesday.

"I'm convinced of it," Baroin told Europe 1 radio.

"We know where we are going, we know that we don't want Greece to default," Baroin said, stressing that the crisis was "serious" and a "threat on a global scale."

Sarkozy and German Chancellor Angela Merkel seemed to have resolved earlier differences, insisting "a quite broad agreement" had been reached on the main sticking point, that of boosting the EU bailout fund.

Leaders are concerned the 440-billion-euro ($605-billion) European Financial Stability Facility (EFSF) will be insufficient if it has to bail out a big country like Italy, so are examining ways to beef up its firepower without actually putting in more money.

European Commission President Jose Manuel Barroso said he was confident the corresponding decisions would be taken in the next 72 hours.

According to EU president Herman Van Rompuy, there were two models still on the table.

One is a scheme whereby the fund would insure investors against potential losses on their bond holdings, a bid to tempt nervous traders back into buying the debt of shaky economies.

The other option would create a second fund to attract contributions from non-European nations such as China, although this has prompted splits within the EU.

By using such financial inventiveness, leaders hope to "leverage" the fund up to as much as a trillion euros, which they hope will be enough of what has become known as a "bazooka" to reassure volatile financial markets.

Van Rompuy told reporters: "It could even be that we combine the two models and have a cumulative effect."

European leaders also achieved breakthroughs on two related and complex issues, managing a huge write-down on the debt of stricken Greece and making sure banks had enough resources to withstand these losses.

Again, the summit produced no concrete figures in this area, but negotiations are underway with banks for them to take losses of at least 50 percent on their holdings of Greek bonds.

EU economic affairs commissioner Olli Rehn's spokesman, Amadeu Altafaj said that a deal to write off about half of Greece's 350-billion-euro debt pile was "relatively close".

And in Berlin, Chancellor Angela Merkel's spokesman Steffen Seibert insisted that "negotiations are contiuing intensively in Brussels."

After hours of pressure on Italy to reduce its staggering 1.9-trillion-euro pile of debt, Prime Minister Silvio Berlusconi said he would hold an emergency cabinet meeting on Monday to try and plough through reforms.

The meeting was scheduled for 6:00 pm (1600 GMT) on Monday.

Van Rompuy called for a "major effort" from Italy and said EU leaders would work "hand-in-hand" with Berlusconi to ensure promises are fulfilled.

Merkel too urged "credible" cuts in Italy's debt as part of efforts to save the eurozone.

"Italy is a great economic force but Italy also has a very high level of debt and it must be reduced in a credible way over the coming years," she said.

© 2011 AFP

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