Euro stabilizes, world stocks above 3-week low

Thu Nov 10, 2011 7:42am EST
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By Natsuko Waki

LONDON (Reuters) - The euro rose from a one-month low versus the dollar on Thursday and top-rated government debt fell while world stocks held above a three-week trough on hopes new governments being formed in Italy and Greece could help fend off a euro zone break up.

Italy, which has overtaken Greece as the main focus of investor concern, was forced to pay a 6.087 percent yield, the highest in 14 years, at a one-year debt auction on Thursday to place the full planned amount of 5 billion euros ($6.8 billion).

The euro zone's two-year-old crisis is escalating rapidly because the bloc cannot afford to bail out Italy. EU officials told Reuters that French and German officials had held talks on splitting the euro zone.

Former European Commissioner Mario Monti emerged on Thursday as favorite to replace Silvio Berlusconi and form a new government to stave off a run on Italian bonds.

Greek bank stocks rallied more than 8 percent on expectations former European Central Bank Vice President Lucas Papademos may be appointed as head of a new coalition government.

Investors hope new governments can quickly set out and enact austerity measures.

"The fundamentals are out of the window now. It's all politics. Austerity measures would help in the long term, but not in the short term, because austerity means your economy shrinks. You can't have pain-free austerity," said Andy Lynch, fund manager at Schroders.

The MSCI world equity index was down 0.7 percent, having hit its lowest since October 21 earlier. The index is down nearly 10 percent since January.   Continued...

<p>A man's shadow is cast on monitors displaying stock market prices inside a brokerage in Taipei November 10, 2011. REUTERS/Pichi Chuang</p>