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MENAFN - Arab News - 13/10/2012

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(MENAFN - Arab News) A surprisingly big drop in weekly US jobless claims helped shore up financial markets yesterday despite a downgrade of Spain's sovereign credit rating.

European stocks rallied as a drop in US jobless claims fueled recovery hopes for the world's biggest economy while Spain's credit downgrade boosted expectations that Madrid would soon request a bailout.

The FTSEurofirst 300 index of top European shares unofficially closed 0.9 percent higher at 1,099.37 points, snapping a three-day losing streak during which the index had lost 1.9 percent.

Brent crude oil reached its highest in a month yesterday, lifted by escalating tension between Syria and Turkey, maintenance in the North Sea and a supply crunch in oil products.

Brent crude was up 1.41 at 115.74 a barrel at 1511 GMT, having traded from 114.42 to 116. US crude was up 1.30 at 92.55 a barrel, having traded from 91.09 to 92.94.

Talence Gestion fund manager Alexandre Le Drogoff, said: "Even as economic growth remains sluggish, we have the feeling that the safety nets put in place by the ECB will work, and it's a big relief. It basically brings back visibility."

Markets headed higher as the IMF earlier backed giving Greece and Spain more time to reduce their budget deficits, cautioning that cutting too far, too fast would do more harm than good.

But Germany pushed back and said back-tracking on debt-reduction goals would only hurt confidence, a stance that suggested some disagreement between the International Monetary Fund and Europe's largest creditor country.

"The IMF has time and again said that high public debt poses a problem," German Finance Minister Wolfgang Schaeuble said. "So when there is a certain medium-term goal, it doesn't build confidence when one starts by going in a different direction."

"When you want to climb a big mountain and you start climbing down then the mountain will get even higher."

The IMF released new research this week showing that fiscal consolidation has a much sharper negative effect on growth than previously thought. Since the global financial crisis, these so-called fiscal multipliers have been as much as three times larger than they were before 2009, the IMF research shows.

That means aggressive austerity measures may inflict deep economic wounds that make it harder for an economy to get out from under heavy debt burdens.

"It is sometimes better to have a bit more time," IMF Managing Director Christine Lagarde said.

"That is what we advocated for Portugal; this is what we advocated for Spain; and this is what we are advocating for Greece."

But the IMF was less willing to be patient with Europe on following through with its efforts to seek a more cohesive fiscal and banking union. It said that process was critically incomplete, and blamed the plodding pace for contributing to economic uncertainty that was hurting global growth.

Emerging markets expressed frustration that the euro zone troubles were spilling into their economies.

The IMF still expects emerging markets to grow four times as fast as advanced economies, but it cut its forecast sharply for two of the biggest players, Brazil and India.

"Europe has to get its act together," said Palaniappan Chidambaram, India's finance minister, speaking on behalf of the Group of 24 developing and emerging economies. "What is happening in Europe is having an impact on developing countries."

The IMF has expressed frustration with Europe's piecemeal response to its debt crisis and warned that a recent respite in borrowing costs for debt-laden countries such as Spain may prove short-lived unless euro zone leaders come up with a comprehensive and credible plan.

Standard & Poor's cut its rating on Spain on Wednesday to a level just above junk territory, and Moody's may soon follow.


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