LONDON (Reuters) - The euro jumped and European shares turned higher on Wednesday after a European Central Bank policymaker said there were reasons to boost the firepower of the euro zone’s new bailout fund to tackle the region’s deepening debt crisis.
Governing Council member Ewald Nowotny said there were arguments for giving Europe’s permanent rescue fund a banking license which would allow it to borrow unlimited ECB money, an idea that the central bank has rejected so far.
Investors have become increasingly worried that the firepower of the new fund would be hugely diminished if, as widely expected, Spain needed a full scale sovereign bailout on top of the rescue deal for its banks
The euro jumped to $1.2115 on the comments before paring gains to be up 0.2 percent on the day at $1.2081 and not far from its two-year low of $1.2042 hit on Tuesday.
Meanwhile European Union officials said that Greece had little hope of meeting the terms of its bailout, casting fresh doubt on its future in the euro zone and keeping any renewed optimism for a quick fix to the crisis in check.
“Overall, risk aversion is set to remain highly elevated as no resolution to the euro zone crisis appears (likely) to come out over the short term,” Credit Agricole analysts said in a note to clients.
MSCI’s world equity index .MIWD00000PUS, which has lost about 2.7 percent this week as concerns over the impact of Europe’s debt crisis on corporate revenues globally have mounted, was down about 0.2 percent to 303.03 points.
The FTSE Eurofirst .FTEU3 index of top European shares which had opened lower for a fourth straight day edged up 0.1 percent at 1,019.52 points.
Fresh economic data due out later could also depress sentiment with markets expecting a further moderation in the July German IFO business climate index, and looking for UK GDP data to show its third consecutive quarterly contraction.
Reporting by Richard Hubbard; Editing by Anna Willard