European shares, euro rally on Spanish bond auction

The next decisions by credit ratings agencies are hanging over the trading climate.

But the latest indicator of purchasing manager sentiment in the eurozone, a closely watched barometer of underlying economic trends, signalled that a sharp slowdown in the last quarter may be easing at least in Germany and France.

In late morning deals, London's FTSE 100 index added 0.55 per cent to 5,396.44 points, Frankfurt's DAX 30 gained 1.06 per cent to 5,735.17 points and in Paris the CAC 40 won 0.71 per cent to 2,997.33.

The European single currency advanced to $1.3013 from $1.2979 late in New York on Wednesday, when it had struck an 11-month low point.

But stocks in Asia fell on Thursday on growing doubts over last week's European debt deal as Germany warned the crisis would last for years and again showed reticence about increasing eurozone rescue funds.

Europe's main markets had slumped on Wednesday and the euro hit $1.2946 -- the lowest level since January 11 -- after news that Italy sold debt at the highest yield since the creation of the euro.

However, Spain announced on Thursday that it has raised 6.0 billion euros ($7.8 billion) in a bond auction, nearly double the planned amount.

The sale of sovereign bonds of four, nine and 10 years' maturity raised 6.028 billion euros, above the planned range of 2.5-3.5 billion euros.

Average yields remained high at more than 5.0 per cent on the nine- and 10-year bonds but fell on the four-year bonds.

"Investors are making clear that that are less dissatisfied with Spain's fiscal position than that of Italy," Rabobank analyst Jane Foley told AFP.

"In part I think that is related to Spain's smaller debt/GDP ratio and also to the fact that Spain is facing a refinancing profile next year which is significantly smaller than Italy's need of over 300 billion euros.

"That said, Spain still needs to shift a lot of paper in 2012 and given the very weak economic backdrop, the Treasury still faces an uphill battle."

Investors are on tenterhooks that the eurozone's sovereign debt crisis, which has already sparked massive EU/IMF bailouts for Greece, Ireland and Portugal, could spread to Madrid and Rome.

Eurozone countries have to sell huge amounts of debt next year, and analysts are wondering how they will achieve this.

European Union leaders from 26 of the 27 member states agreed at a high-stakes Brussels summit to back a Franco-German drive for tighter budget policing in a bid to save the eurozone.

After non-euro Britain blocked changes to an EU-wide treaty, the other 26 EU states signalled their willingness to join a "new fiscal compact" imposing tougher budget rules.

However, the summit's plans for a $200 billion boost to the International Monetary Fund were thrown into doubt when Germany said it would not provide any extra cash if other non-euro member nations, including Britain and the United States, did not contribute.

Meanwhile, accountancy group Ernst & Young warned on Thursday that a eurozone breakup was "still possible" -- and predicted that the bloc faces the likely prospect of a mild recession in the first half of 2012.

"The latest developments in Greece, Italy and Spain and the European agreement lowers the risk of a break-up of the eurozone," said E&Y in a report.

"This risk remains however, especially since in 2012 very large amounts of sovereign debt require refinancing which could cause tensions."

The eurozone economy is expected to grow by just 0.1 per cent in the whole of 2012, according to E&Y.

"The reforms agreed at the summit were a step in the right direction and the response seems to have been mildly positive," E&Y added.

"Yet investors remain very concerned about the commitment and ability of eurozone governments to implement reforms quickly."

Standard & Poor's is expected to decide soon whether or not to downgrade 15 of the 17 eurozone members after putting them on warning last week.

And rival agency Moody's has said the crisis talks failed to produce "decisive policy measures", saying it would review the credit ratings of all EU states within the next three months.