European shares, euro rally but crisis dominates

European shares and the euro rose on Thursday but the eurozone debt crisis weighed heavily on sentiment, with attention focused on a crucial bond issue in Spain and the next moves by rating agencies. In early morning deals, London's FTSE 100 index added 0.40 percent to 5,388.01 points, Frankfurt's DAX 30 gained 0.79 percent to 5,715.65 points and in Paris the CAC 40 won 0.66 percent to 2,995.85. The European single currency drifted upward to $1.2987 from $1.2970 late in New York on Wednesday, when it had struck an 11-month low point. "Markets are staging something of a recovery this morning as traders edge back into assets that suffered the brunt of yesterday's selling," said ETX Capital trader Manoj Ladwa. However, stocks in Asia fell for a third session running on Thursday on growing doubts over last week's European debt deal as Germany warned the crisis would last for years and again showed reticence about increasing eurozone rescue funds. Europe's main markets had slumped on Wednesday and the euro hit $1.2946 -- the lowest level since January 11 -- after news that Italy sold debt at the highest yield since the creation of the eurozone. And the British pound had soared to a 10-month peak at 1.1943 euros on Wednesday, hitting the highest level since February 18. Later on Thursday, traders will digest the outcome of Spain's latest bond auction results. Investors are on tenterhooks that the eurozone's sovereign debt crisis, which has already sparked massive EU/IMF bailouts for Greece, Ireland and Portugal, could also spread to debt-laden pair Portugal and Spain. "Spain will attempt to sell 3.5 billion euros ($4.5 billion) of bonds maturing in 2016, 2020, and 2021 today," said CMC Markets analyst Michael Hewson. "Against the backdrop of Italy's five-year bond yield hitting record levels yesterday, and the report from Ernst & Young suggesting the possibility of a euro break-up ... investor focus will be very firmly trained on the (Spanish) yields and bid-to-cover figures," he added. Eurozone countries have to sell huge amounts of debt next year, and analysts are wondering how they will achieve this. European Union leaders from 26 of the 27 member states agreed at a high-stakes Brussels summit to back a Franco-German drive for tighter budget policing in a bid to save the eurozone. After non-euro Britain blocked changes to an EU-wide treaty, the other 26 EU states signalled their willingness to join a "new fiscal compact" imposing tougher budget rules. However, the summit's plans for a $200 billion boost to the International Monetary Fund were thrown into doubt when Germany said it would not provide any extra cash if other non-euro member nations, including Britain and the United States, did not contribute. Accountancy group Ernst & Young warned on Thursday that a eurozone breakup was "still possible" -- and predicted that the bloc faces the likely prospect of a mild recession in the first half of 2012. "The latest developments in Greece, Italy and Spain and the European agreement lowers the risk of a break-up of the eurozone," said E&Y in a report. "This risk remains however, especially since in 2012 very large amounts of sovereign debt require refinancing which could cause tensions." The eurozone economy is expected to grow by just 0.1 percent in the whole of 2012, according to E&Y. "The reforms agreed at the summit were a step in the right direction and the response seems to have been mildly positive," E&Y added. "Yet investors remain very concerned about the commitment and ability of eurozone governments to implement reforms quickly." On Wednesday Rome's five year bonds hit a euro-era record and in early trade Thursday the yield on 10-year bonds rose above the seven percent level considered unsustainable for nations to service their debts. "The auction of Italian bonds yesterday made it painfully clear to European politicians that despite their efforts at the EU summit last week they were unable to regain investor confidence," said Commerzbank analyst Thu Lan Nguyen. "The Italian Ministry of Finance had to refinance itself at yields of 6.47 percent - the highest level since the introduction of the single currency." Standard & Poor's is expected to decide soon whether or not to downgrade 15 of the 17 eurozone members after putting them on warning last week. And rival agency Moody's has said the crisis talks failed to produce "decisive policy measures", saying it would review the credit ratings of all EU states within the next three months.