Spanish austerity vote helps reverse euro decline

By Daniel Trotta Daniel Trotta

Spain turned to austerity while China and the United States offered soothing words about Europe on Thursday, providing a respite in the euro-zone debt crisis that allowed markets to recover.

Spain's governing Socialists won parliamentary approval for a 15 billion euro ($18.4 billion) austerity package by a single vote in an effort to cut its budget deficit and regain market confidence.

Fears that soaring Greek budget deficits and violent street protests could infect other euro zone countries sparked a sell-off that had pushed the euro currency to a nearly four-year low versus the U.S. dollar after losing 8 percent this month.

But the euro rebounded 1.6 percent versus the dollar and 1.4 percent versus the yen while the continent's main stock index climbed 2.9 percent.

U.S. stocks rose sharply with the S&P 500 closing 3.3 percent higher, its largest gain on a percentage basis since May 10, although volume was below average. The Dow gained 2.9 percent to close above 10,000 points at 10,259. The Nasdaq rose 3.7 percent for the day.

Global markets received a boost when China reaffirmed its long-term strategy of diversifying currency holdings away from the dollar and denied it was reviewing its holdings of euro sovereign bonds.

The People's Bank of China said in a statement that a Financial Times report that the State Administration of Foreign Exchange (SAFE) was concerned about its exposure to euro-zone debt was groundless.

The central bank said Europe would remain one of China's main investment markets and Beijing would support actions to help the European Union resolve its debt crisis.

The United States also offered comforting comments when Treasury Secretary Timothy Geithner said America and Europe broadly agreed on the need for controls on risk-taking, playing down differences on financial regulation.

"I think we all agree we want more conservative restraints on capital and leverage," Geithner said after talks in Berlin with German Finance Minister Wolfgang Schaeuble.

Washington has grown increasingly concerned that the effects of the Greek fiscal blowout could spread beyond Europe, with banks prone to a similar meltdown that roiled world markets during the 2007-2009 financial crisis.

A day earlier in London, Geithner chided Europeans for their response to the crisis, saying, "What markets want to see is action."

The Kuwait Investment Authority also denied a media report that the Gulf oil producer's sovereign wealth fund was reducing its exposure to the euro zone, saying there was no change to its long-term investment strategy in Europe.

BANKER BONUSES UNDER FIRE

The crisis has hardened attitudes among some European Union lawmakers toward the financial industry, with one EU lawmaker proposing bankers forfeit up to 70 billion euros in bonuses over the next decade to pay for an emergency crisis fund.

The plea by Sharon Bowles, head of the European Parliament's influential Economic and Monetary Affairs Committee, added to the momentum for a bank levy proposed by the 27-country bloc's executive body, the European Commission.

Germany agreed to a 110 billion euro Greek rescue and the $1 trillion emergency scheme only in return for pledges of drastic spending cuts from potential beneficiaries.

Greece, Portugal, Spain and Italy have all agreed to push through multibillion-euro savings despite fierce opposition from trade unions and sometimes violent street protests.

Spanish Prime Minister Jose Luis Rodriguez Zapatero owed his thin victory on the deficit-cutting plan to the abstention of Catalan nationalist lawmakers, underlining his precarious position.

Spanish trade unions were meeting to consider protest action over the planned public-sector wage cuts, pension freeze and civil service hiring restrictions.

French unions were staging a day of action against government proposals, still to be spelled out in detail, to increase the retirement age.

(Reporting by Sonya Sowsett in Madrid; Simon Rabinovitch and Aileen Wang in Beijing; Glenn Sommerville in Berlin; Editing by Paul Taylor, Tomasz Janowski and Jan Paschal)