The incipient panic about Europe's debt crisis seems to have subsided into mere pessimism this week, with the euro rebounding and investors encouraged by political leaders' new willingness to take quick action to calm market fears.
The big underlying issues haven't been erased: Spain is still dogged by speculation it may eventually need a rescue plan similar to the bailout already given to Greece. And many governments are cutting back on welfare programs and other spending to chip away at their heavy debt burdens — and sometimes facing street protests as a result.
Yet positive news from trouble spots Spain and Greece — as well as EU leaders' united pledge for more banking transparency — helped buoy the euro to $1.2362 Friday, up from a four-year low last week near $1.19, and European stocks held steady.
A key decision was the move by European Union leaders at a summit in Brussels to promise they would reveal the results of stress tests designed to show how banks would do if circumstances worsen. They indicated the added transparency would show that fears about the health of the banking system are overblown.
Worries about Europe facing a worsening crisis that could derail its hesitant economic recovery had weighed on stocks in the United States and Asia over recent weeks.
"I think the market certainly wants to believe that it's turning the corner, and of course psychological factors are at work here — it's very difficult for any market to maintain a mood of despondency for month after month," said Stephen Lewis of Monument Securities.
Pressure on the euro will probably be relieved until the month's end, though in July the currency could once again dip lower, he predicted.
For a morose Europe, the good news came in threes. First, an international delegation declared Thursday that debt-ridden Greece is on track with reforms required in its massive bailout from the European Union and the International Monetary Fund. Then Spain managed to raise 3.5 billion euros ($4.3 billion) from what analysts deemed a successful bond offering, with more demand than there were bonds to be sold — though investors charged the government higher interest rates.
Then came the stress test decision, seen as a vote of confidence in the health of banking sector and a sign of new willingness to meet market concerns head-on.
Though there are questions about how the results will be released — whether they will be sufficiently transparent and in a harmonized framework — it was still an "extremely positive" sign, said Marco Annunziata, an economist at UniCredit bank.
It was a sharp switch from the railing against "speculators" that political leaders have indulged in, or the delay in taking action that marked the early months of this year after the Greek crisis mushroomed and the euro began its slide.
Policy makers in Europe have stopped "simply complaining about markets and almost blaming investors for everything going wrong and switched to a realization that investors do need more information," Annunziata said.
Iain Begg, a professor at the London School of Economics, said there's a consensus now "that the cost of dealing with Greece grew because of procrastination. It's a general learning (process), that they have to accommodate the markets rather than just assume, 'they're evil Americans.'"
Germany had initially resisted releasing the stress tests but changed its tune. Though there are concerns current national law might prevent their release, Chancellor Angela Merkel pledged Friday that "we will find ways" to do it — a contrast to her initial stubborn resistance to the Greek bailout and demands of strict conditions on the loans.
European markets have been spooked since Greece demanded a bailout to prevent a humiliating default. A 750 billion euro ($1 trillion) "shock and awe" financial rescue package is also being set aside in case other indebted EU nations need help, and though it eased tensions it has failed to put an end to fears of a deeper crisis in the region.
In a sign of how dramatic the situation was before the package was approved, the European Central Bank said this week that the financial market situation in Europe early last month was as tense as it had been following the collapse of Lehman Brothers.
The events leading up to the massive rescue plan also brought a sudden change in sentiment, an abrupt flight to safety by investors and a resulting liquidity squeeze, the ECB said in its monthly bulletin for May.
Across Europe, countries are trying to slash their deficits: Germany plans to cut 80 billion euros in spending over the next four years, while Britain is unveiling an emergency budget next week with cuts to welfare benefits and the wages of state employees.
Trouble spot Spain is pushing through budget cuts and labor reforms that Spanish Prime Minister Jose Luis Rodriguez Zapatero claimed would prevent new redundancies and encourage companies to hire more workers.
EU leaders meeting in Brussels this week insisted that they are not worried about Spain. IMF Managing Director Dominique Strauss-Kahn, in Madrid on Friday for talks with Zapatero, praised the government's handling of its economy.
Earlier this week, Strauss-Kahn's office had denied a report that he was traveling to Madrid to work on a bailout package. Spain's government has also strongly denied such rumors.
"I'm confident," Strauss-Kahn said. "That's the main message I want to give."
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