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Market fears over Italy, Greece ease further

By Pan Pylas
AP Business Writer / November 11, 2011

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LONDON—The prospect of new governments in Greece and Italy helped support market sentiment Friday, at the end of a hugely-volatile week when investors fretted over the future of the euro currency and the outlook for the global economy.

With Greece having appointed Lucas Papademos as the prime minister of a coalition government, and Italy expected to appoint a new government headed by respected economist Mario Monti, both countries have won some breathing space to get their economies into shape.

"Equity markets are seemingly looking a little more kindly on Europe as we head into the weekend break with news of Berlusconi's accelerated departure, combined with progress from Greece over the formation of a coalition government, helping cheer stocks on a global basis," said Peter Stanhope, institutional trader at IG Index.

In Europe, Germany's DAX was up 1.3 percent at 5,943 while the CAC-40 in France rose 0.9 percent to 3,092. The FTSE 100 index of leading British shares was 0.7 percent higher at 5,480. Italy's main index in Milan was also 1.1 percent higher.

Wall Street was heading for a perky opening, though trading volumes are expected to be light on Veteran's Day, when government effectively shuts down for the day. Dow futures were up 0.6 percent at 11,927 while the broader Standard & Poor's 500 futures rose 0.7 percent to 1,2475.

The calm tone was also evident in the performance of the euro, which was 0.3 percent higher at $1.3640, as well as the performance of Italian government bonds. The spike up in Italy's key borrowing rate to well over 7 percent on Wednesday stoked fears that the eurozone's economy was heading for a Greek-style economic crisis. Only this time, the repurcussions would be far worse as Italy's debt mountain of euro1.9 trillion ($2.6 trillion) appears to big for Europe's current bailout facility to handle.

However, expectations that Monti will lead a post-Berlusconi government has helped calm those jitters, and Italy's ten-year bond yield was now down below the 7 percent threshold that eventually forced Greece, Ireland and Portugal to seek bailouts. It fell another 0.17 percentage point Friday at 6.62 percent.

Italy is under intense pressure to prove it has a strategy to deal with its debts, which stand at 120 percent of economic output -- it has to rollover a little more than euro300 billion of its debts next year alone. But economic growth is weak and the government failed to enact reforms to revive it over the past decade.

With the eurozone and global economies at risk in the event of an Italian default, European governments are pushing Italy to clear up questions over its political leadership quickly.

On Friday, Italy's Senate approved economic reforms demanded by the European Union, paving the way for Premier Silvio Berlusconi to resign as early as this weekend and a new government to be formed. The lower Chamber of Deputies is expected to approve the legislation by Saturday. Berlusconi has promised to resign as soon as parliament passes the reforms.

Meanwhile in Athens, new Greek Prime Minister Lucas Papademos was preparing to name his cabinet Friday, a day after being appointed to head an interim coalition government that will push through a new European debt deal and secure continued bailout funding to prevent a catastrophic default.

Former European Central Bank vice president Papademos held talks with the country's main political parties late into Thursday night to determine who would staff his cabinet, ahead of the formal swearing in early Friday afternoon.

His appointment capped two weeks of a political crisis that threatened to derail an EU plan to get a grip on the Greek debt crisis and raised questions about the country's continued presence in the eurozone.

Papademos must now implement the terms of Greece's latest debt deal -- a euro130 billion ($177 billion) agreement reached on Oct. 27. It includes provisions for private bondholders to forgive 50 percent, or some euro100 billion, of their Greek debt holdings.

He must also secure the next euro8 billion installment of the country's initial euro110 billion eurozone and International Monetary Fund bailout, without which Greece will default in a matter of weeks.

European officials have said they will withhold the funds until Greece passes the new debt deal, and they have also asked for written guarantees from the heads of the country's two main parties, its central bank governor, and the new premier and finance minister.

Earlier in Asia, Japan's Nikkei 225 index closed up 0.2 percent to 8,514.47, a day after the index fell to a five-week closing low of 8,500.80. Hong Kong's Hang Seng gained 0.9 percent to 19,137.17 and mainland China's Shanghai Composite Index rose marginally to 2,481.08.

Oil prices tracked equities higher -- benchmark oil was up 5 cents at $97.80 a barrel in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok contributed to this report.