Signs of progress in Greece and Spain calm financial markets

Share prices rise, euro rallies and bond market pressure eases amid hopes of Greek coalition and Spanish bank bailout

Nerves have steadied on the world's financial markets after Greece appeared to be inching its way towards a government of national unity and Spain prepared a fresh bailout of several banks.

Although trading remained jittery following the weekend elections in France and Greece, share prices rose, the euro rallied and bond-market pressure eased on the weaker members of the eurozone.

Hopes also rose that talks in Athens could result in the socialist leader, Evangelos Venizelos, forming a coalition between his Pasok party, the centre-right New Democracy and the Democratic Left, which would be able to command a parliamentary majority and avoid the need for fresh elections next month. The Democratic Left appeared to be softening its opposition to the austerity measures, in return for Greece receiving financial help from the European Union and the International Monetary Fund.

Further evidence of the depth of Greece's five-year slump became apparent when the country's latest unemployment figures showed the jobless rate running at a record 22%, with 54% of the 18-24 age bracket out of work. With the EU making clear that it would keep up Greece's bailout payments until the end of June, the stock market in Athens reversed some of its heavy losses earlier this week and posted a 4% gain.

The FTSE 100 index in London recorded a modest 13.90-point gain to 5543.95, while New York's Dow Jones Industrial Average rose by 70 points in morning trading. The City paid little heed to the widely expected decision by the Bank of England to peg its key interest rate at 0.5% while announcing no extra boost to the money supply after the purchase of £325bn of government gilts from the financial sector since early 2009.

Analysts said the recent weakness of the economy, coupled with the renewed tension in the eurozone meant the bank's nine-strong monetary policy committee would look again at the case for additional quantitative easing over the coming months. Vicky Redwood, a UK analyst at Capital Economics, said she was pencilling in £50bn of QE to be announced in August because she expected inflation to fall and the soft patch in the economy to continue.

Figures from the Office for National Statistics showed manufacturing output rebounded from a sharp fall in February to post a 0.9% gain in March. However, energy production dropped as a result of the warm weather, leaving industrial production – manufacturing, energy supply and the output from the North Sea – down by 0.3% on the month. The 0.4% increase in industrial production in the first three months of 2012 was in line with estimates used by officials when they said output dropped by 0.2%, making it less likely that the UK's double-dip recession in late 2011 and early 2012 will be revised away in the coming months.

The National Institute of Economic and Social Research said the UK economy grew by 0.1% in the three months to April, but remained weak.


Larry Elliott, economics editor

The GuardianTramp

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