Greek and US cheer lifts markets

European and US bourses are up on new hope that the world may not fall back into recession.

Jean-Claude Trichet reiterated that European banks were not suffering from a liquidity shortage. Reuters

New hope that the world may not sink back into recession cheered global investors yesterday.

European markets rose 2 per cent and US stocks opened higher after better-than-expected US consumer spending data and news of a merger between two of Greece's biggest banks, backed by Qatar.

Consumers in the US spent 0.8 per cent more last month than in June, the biggest month-on-month increase since February, government data revealed. Spending accounts for about 70 per cent of economic activity in the US.

A planned merger between Greece's second and third largest banks, Eurobank and Alpha, sent Greek stocks up over 15 per cent. The merger is to come with a capital increase funded partly by Qatar's Paramount Services Holding.

It is "important that Qatar participates and invests in Greece, sending a message abroad of confidence" in the Greek economy following recent EU-IMF bailouts, Evangelos Venizelos, the Greek finance minister said.

Worry is still looming, however. Europe's leaders have yet to resolve the continent's sovereign debt crisis despite spending billions of euros on bailouts, and political tensions are running high over the possibility of more aid.

The US has shown few signs of a strong recovery, and investors continue to buy gold. The metal remains at about $1,822 per ounce, not far below its all-time high of $1,913 last week.

"The odds of a US double-dip over the coming year are uncomfortably high, but euro-zone sovereign debt issues are definitely more troubling," said Jaap Meijer, an analyst at AlembicHC in Dubai. "The difference with 2008 is that US and European banks are better capitalised and a bit more liquid, but on the other hand the governments in the developed world can no longer accommodate a recovery, while monetary policy is already very loose."

Jean-Claude Trichet, the president of the European Central Bank, reiterated that European banks were not suffering from a liquidity shortage. He defended the bank's bid to reduce borrowing costs for Spain and Italy by buying their government bonds. But he warned that buying bonds was no substitute for fiscal discipline.

"The purchases made on the secondary market cannot be used to circumvent the fundamental principle of budgetary discipline."

Angela Merkel, the German chancellor, meanwhile, fended off rising opposition to proposals for more fiscal integration in Europe.

While observers have long seen coordination on taxation and budgeting as crucial to solving Europe's debt crisis, such unity does not sit well in Germany.

Ms Merkel's spokesman, Steffen Seibert, said an earlier statement from the French President Nicolas Sarkozy calling for a "European economic government" and a new European finance minister was misinterpreted. There was no plan to create an institution that would supercede national sovereignty on issues of economic policy, he said.

Yesterday's rise in global markets also followed a statement late last week from Ben Bernanke, the US Federal Reserve chairman, that suggested a better long-term outlook for the economy than many observers expected.