ECB seeing European 'stabilization'

The eurozone economy is showing "tentative signs of stabilization" European Central Bank president Mario Draghi says.

Draghi made his comments Thursday after the bank, as expected, left its main interest rate unchanged at one per cent.

It had made two monthly quarter point reductions in October and November, in a move to stimulate borrowing and investment in the region, which many economists think is heading back to recession as a debt crisis hits business and consumer confidence.

Draghi says the bank saw "tentative signs of stabilization of activity at low levels" although the economy faced "substantial downside risks."

However, he conceded that the economy of the 330 million or so people in the 17 countries using the shared currency faces "substantial downside risks" from the debt crisis that began more than two years ago.

"It is not possible to express a judgment of confidence," he said at a news conference. He predicted the economy would recover in 2012, "albeit very gradually."

The eurozone grew by only 0.1 per cent in the third quarter and many economists predict a recession.

Draghi appeared to leave the door open for further cuts if the bank thinks they are necessary. "We never precommit," he said. "In this situation of high uncertainty, we look at all factors ... we monitor all developments and we decide."

He added that the ECB "stands ready to act if needed."

The ECB has never cut rates below 1.0 per cent in its 13-year history — not even during the global crisis that followed the collapse of U.S. bank Lehman Brothers in 2008.

"Draghi didn't rule out any further moves," said Benjamin Reitzes, senior economist at BMO Capital Markets.

The euro gained one per cent to trade at $1.28 U.S. after Draghi's comments and amid other positive signs in the European debt crisis Thursday.

Spain and Italy successfully raised nearly €22 billion ($28.7 billion Cdn) in two closely watched auctions that showed renewed investor confidence in their attempts to get a grip on their debt problems.

Spain sold nearly €10 billion ($13 billion) in three- and four year bonds with demand strong and the amount sold double the maximum sought.

Italy saw its borrowing costs drop sharply as it sold euro12 billion ($15.7 billion) in what was also its first test of market sentiment of the new year.

Both debt-laden countries have been the focus of worries they might be dragged further into the crisis threatening the 17 countries that use the euro as their currency that has already forced Greece, Ireland and Italy to seek billions in bailout money.

Meanwhile, the Greek government held crucial talks with representatives of private bondholders to reach a deal on a bond swap that would reduce the country's debt load and is an integral part of its second bailout package.

Charles Dallara, the head of the Institute of International Finance, which represents the country's private bondholders, met Prime Minister Lucas Papademos and finance chief Evangelos Venizelos.

The negotiations were to resume Friday.

"A range of issues were discussed and some key areas remain unresolved. Discussions will continue in Athens tomorrow, but time for reaching an agreement is running short," a statement from the IIF said.

"It is essential in order to finalize the voluntary (bond swap) agreement that support be given by all official parties in the days ahead."

Greece hopes to finalize the deal soon for the private creditors to take a voluntary 50 per cent reduction in the value of their Greek bond holdings.

It needs to clinch the deal before it can access any more rescue loans, which it will need to help repay €14.5 billion ($18.9 billion) in bonds on March 20.

However, there are also investors with an interest in reducing the chances of a deal.

Some hedge funds, for instance, decide to buy up bonds at cheap prices in a bet that they can turn a high profit if they get repaid in full. They may therefore work toward blocking or delaying any agreement on restructuring Greece's debt.

With files from The Associated Press

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Markets eye Bernanke, European crisis

North American stock markets traded lower Thursday as traders debated whether U.S. Federal Reserve chairman Ben Bernanke would announce new economic stimulus measures in a key speech on Friday and worried about the latest developments in Europe's debt crisis.

In Toronto, the S&P/TSX composite index closed down 59.50 points, or 0.48 per cent, at 12,284.31.

In New York, the Dow Jones industrial average fell 170.89 points, or 1.51 per cent, to 11,149.82. The S&P 500 was down 18.33 points, or 1.56 per cent, to 1,159.27 while the Nasdaq composite index lost 48.06 points, or 1.95 per cent, to 2,419.63.

Gold prices reversed recent steep losses. December bullion closed up $5.90 US at $1,763.20 US an ounce.

Investors looking for a safe haven had pushed up the price of gold over the last few weeks to above $1,900 as stock markets turned volatile on worries that the U.S. could slip back into recession.

But profit-taking and higher margin requirements at exchange operator CME Group have pushed gold down more than nine per cent below Monday's latest record close.

Concerns that a second bailout for Greece could fall apart pushed up Greek bond yields and a sudden drop in Germany's stock market late in the session in Europe also spooked markets in North America.

The Canadian dollar slipped 0.02 of a cent to 101.34 cents US.

October crude rose 14 cents to finish at $85.30 US per barrel in New York as traders wondered whether Hurricane Irene, now in the Caribbean, head towards the U.S. east coast.

Analyst Tom Bentz with BNP Paribas Commodity Futures in New York thinks Irene is pushing up oil because of the possible problems that coastal flooding could cause for refineries and shipping. Refineries in Delaware, New Jersey, Pennsylvania and Virginia produce nearly eight per cent of U.S. gasoline and diesel fuel.

Irene is forecast to affect a broad area, from North Carolina to Eastern Canada, with flooding and winds as high as 190 kilometres an hour. Some forecasters think Irene could be the worst hurricane to hit the U.S. Northeast in 50 years.

U.S. gasoline futures rose 4.59 cents to end at $2.8017 a gallon.

S&P/TSX 3-month chart

Bernanke will deliver a speech just after North American markets open at an economic conference in Jackson Hole, Wyo.

"If you're in Bernanke's shoes, on the one hand you sort of want to pacify the markets because that affects consumer confidence and the market is down quite a bit," said Luciano Orengo, portfolio manager at Manulife Asset Management.

"But at the same time, the economy, although it's slowing down, it is not that evident that we're in a recession or anything like that.

Germany's main index, the DAX, fell about 250 points in a matter of minutes to trade down more than four per cent before recovering somewhat. By the close it was down 1.7 per cent.

Analysts and traders could not immediately identify a reason for the slide. Thilo Mueller of MB Fund Advisory said there was no obvious news to send the market down so suddenly and that the drop came "like lightning out of a clear sky."

"No one has been able to give a rational explanation … I think this is not the last word, I am eager to see if there is a reasonable answer why so many shares plunged at the same time," Mueller told The Associated Press.

Other major markets followed the Dax's lead, with London's FTSE 100 index closing down 1.4 per cent and the Paris CAC 40 shedding 0.7 per cent.

Several European countries that banned short-selling have extended the prohibition until the end of September.

Dow Jones industrial 3-month chart

When concerns about European banks' exposure to Greek debt sent their stocks plummeting two weeks ago, market regulators in Belgium, France, Greece, Italy and Spain stepped in to prohibit traders from betting on the decline in a share's price.

On Thursday, the countries extended the ban and said they would reconsider it at the end of next month. Greece's ban expires in October.

Short-selling is a trade in which the investor borrows an asset and sells it in the hope of buying it back at a lower price to repay the loan, while pocketing the difference.

Before the German market went into reverse, American markets had jumped on news that Warren Buffett's Berkshire Hathaway will invest $5 billion US in Bank of America. The bank's shares closed up 66 cents, or 9.44 per cent, at $7.65 US, after gaining as much as $1.81 during the session.

Bank of America shares had fallen sharply recently as doubts rose about the bank's' capital position.

Shares in Apple Inc. closed down $2.46, or 0.65 per cent, at $373.72 US after Steve Jobs announced he was departing as the tech giant's CEO and passed the job to Tim Cook, the company's chief operating officer.

With files from The Canadian Press and The Associated Press Accessibility Links

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