Debt deal delay spurs caution

Reuters and AFP

LONDON/HONG KONG–Stocks clawed back some ground on Friday after France and Germany said a comprehensive euro zone debt deal was on its way, if a little late, although a subdued euro and choppy German bonds showed not everyone was convinced. Germany and France, Europe’s two biggest economies, have been unable to reach agreement on reinforcing the European Financial Stability Facility (EFSF) despite their leaders announcing last week they had a plan in place. Investors have been hammered in recent weeks as Paris and Berlin bicker over how to beef up the fund to save weak economies such as Greece, Italy and Spain and avoid another global financial crisis. France has been pushing for the fund to morph into a bank that could borrow from the European Central Bank (ECB) to help troubled economies, but Berlin opposes that on the grounds it would entail changing the EU’s founding treaty. “Doubts still remain on whether something solid will come out of the meeting,” said Hideyuki Ishiguro, supervisor of investment strategy at Okasan Securities. “The wait-and-see mood will likely continue until Wednesday.” One of the top agenda items for the weekend’s meeting will be deciding whether to approve a fresh multibillion-euro loan for cash-strapped Athens. Hopes that loan would be agreed were boosted by news the Greek parliament had approved late Thursday a controversial batch of tough austerity measures demanded by its creditors. Book-squaring before a weekend of euro zone crisis talks would also likely govern moves across asset classes, traders said, while U.S. stock futures pointed to early gains on Wall Street and Treasuries were flat. The long-running debt saga was meant to be resolved at a meeting of regional leaders on Sunday, but disagreement over the make-up of the sovereign rescue fund, the EFSF, stalled talks and sparked a sell-off in riskier assets on Thursday. A communique from French President Nicolas Sarkozy and German Chancellor Angela Merkel, following the European close, said the wide-ranging plan would now be announced no later than Wednesday. “The enthusiasm, bordering on euphoria, that appeared to have swept up risk assets early in the week has now entirely evaporated and investors appear primed for a critical weekend almost expecting to be disappointed,” Altium Securities said in a note. The need to reach a debt deal, and quickly, was reflected in German business sentiment data showing a fall for the fourth month in a row, the latest sputtering in Europe’s growth engine. European stocks rose in early trade Friday with London’s benchmark FTSE 100 index adding 0.36 percent, Frankfurt’s DAX 30 gaining 0.58 percent and, in Paris, the CAC 40 rose 0.86 percent. Wall Street provided a mixed lead for Asian shares, with the Dow up 0.32 percent, the S&P 500 up 0.46 percent and Nasdaq down 0.21 percent.