Business

Global financial markets rise amid bail-out rumours

Jose Socrates
Image caption Portugal's central bank has told the government of Jose Socrates to sort out public finances

World stock markets and the euro have surged amid reports that Washington may join Europe in further support for heavily indebted countries.

The US Treasury has sent an envoy to Europe to discuss the continuing financial crisis.

It follows comments from European Central Bank chief Jean-Claude Trichet that people should not "underestimate" the eurozone's "determination" to act.

Meanwhile, Portugal's PM has insisted that Lisbon does not need a bail-out.

Germany's Dax stock index led European markets higher, rising 2.6%, with the FTSE 100 up 2%, ending days of losses. Wall Street opened more than 2% up.

In mid-day trading in New York, the euro jumped to $1.3140, up from $1.3011 on Tuesday.

Envoy

Investors' confidence was boosted by a belief that central banks are ready to inject more funds into European economies to resolve the sovereign debt crisis.

Treasury Secretary Timothy Geithner has sent Lael Brainerd, the department's top official on international matters, for talks with European officials.

Mr Brainerd had meetings in Madrid on Wednesday and was scheduled to be in Berlin on Thursday and Paris on Friday.

The US "can't afford to let Europe implode", said David Gilmore, analyst at Foreign Exchange Analytics.

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Speculation that the European Central Bank (ECB) plans to expand its government bond repurchase scheme began after a speech by Mr Trichet on Tuesday evening.

The ECB has spent 67bn euros (£56bn; $88bn) on purchases so far, and markets are now waiting to see if the governing council announces that it is expanding the programme following its rate-setting meeting on Thursday.

After the Republic of Ireland's bail-out, debt concerns have moved to Portugal.

Prime Minister Jose Socrates insisted that the country did not need bailing out. What the economy needed, he said, was "confidence".

He said in a radio interview: "I do not see any reason to change the position of the Portuguese government which is very clear: we do not need any help, what we need is confidence in the Portuguese economy."

'Expensive' bonds

Lisbon's latest bond auction was successful on Wednesday, but the yield it has had to offer investors has risen sharply, indicating declining confidence in country's finances.

The sale of 500m euros worth of one-year bonds was two and a half times oversubscribed.

The yield rose to 5.3%, which BBC business editor Robert Peston said was "hugely expensive" for one-year bonds.

Bonds are effectively loans, in this case made by investors to governments.

The higher the yield of a bond at auction, the riskier investors think that loan is, so the government has to offer them a higher rate of return to ensure it attracts enough buyers.

The previous release of one-year Portuguese bonds had a lower yield of 4.8%.

While the latest auction was oversubscribed, our business editor also questioned how many of the government bonds were bought by Portuguese banks funded by the European Central Bank.

Bank fears

Portugal's central bank has warned of the "intolerable risk" facing its banks if the government failed to consolidate public finances.

Lisbon, which approved an austerity budget for 2011 last week, is struggling to meet its targets for deficit reduction.

Our business editor said Portuguese officials had told him it was now "not a question of if there will be a bail-out, but when".

He added that Portugal was in a "perilous" position, because Portuguese banks were lending the government billions of euros that they had borrowed from the European Central Bank.

Camilo Lourenco, a Portuguese economic commentator, also appeared to agree that Portugal would need assistance, saying the country might need to go into "quarantine".

He told RTP Internacional, the international TV channel of Portugal's public broadcaster: "We are in a group and we are married to 16 countries.

"Some people in this family are not well, they have a contagious disease, and the most likely scenario is that those who are not sick want to set up a quarantine room to put the sick people in.

"Portugal is a very strong candidate, as is Spain and probably even Italy."