LONDON — European markets recovered some lost ground Thursday as Italy's borrowing rates eased somewhat on speculation that a technocratic government led by economist Mario Monti will replace Premier Silvio Berlusconi.
Fears that Italy, the third-largest economy in Europe, could default on its $2.6 trillion debt had sent stock markets plunging Wednesday as Italy's key borrowing rate spiked way above the 7 percent threshold. Greece, Ireland and Portugal had to eventually seek outside financial help when their borrowing rates rose above that level.
The hope in the markets Thursday is that Monti, a former European competition commissioner, will become the country's next premier, now that Berlusconi has pledged to resign soon.
"On a positive note, parliament looks set to approve the austerity package earlier than previously thought," said Adam Cole, an analyst at RBC Capital Markets. "Approval by the weekend should see incumbent Berlusconi depart by Monday."
Tensions have also eased on the news that Italy easily sold euro5 billion ($6.8 billion) in 12-month bonds at borrowing rates which were not as bad as expected. Investors asked for an interest rate of 6.087 percent to lend Italy 12-month money.
Though that's up sharply from 3.57 percent in the last such auction last month, it's well below analyst expectations of 7 percent. Demand for the bonds was almost twice the amount on sale.
The sale injected some renewed confidence into the Italian bond market, bringing down the benchmark 10-year bond yields to below the dangerous 7 percent levels on the secondary market.
Italy is under pressure to prove it can push through the reforms needed to convince investors it can repay its debts. The president pledged reforms will be passed soon, likely by Saturday, after which Berlusconi will resign.
The calmer tone in Italian bond markets drove a modest pick-up in European markets. Milan's main stock market was outperforming its European peers, trading 2.7 percent higher. Germany's DAX was up 0.6 percent at 5,862 while the CAC-40 in France was 0.1 percent higher at 3,077. The FTSE 100 of leading British shares was down 0.6 percent at 5,430.
Wall Street was poised for small gains at the open following Wednesday's dramatic declines — Dow futures were up 0.7 percent at 11,819 while the broader Standard & Poor's 500 futures rose 0.9 percent to 1,237.
The euro was also in demand, trading 0.4 percent higher at $1.3585.
As well as keeping one eye on developments in Rome, investors are waiting to hear who will be the new prime minister in Greece.
Former European Central Bank Vice President Lucas Papademos is favorite once again to be appointed to the job now that he's joined Greek political leaders at powersharing talks to form a new government.
Papademos is considered the front-runner to lead a new 15-week coalition government, tasked to secure continued bailout funding and a new euro130 billion ($177 billion) rescue package for Greece from eurozone partners and the International Monetary Fund.
Papademos joined the talks Thursday, two hours after the meeting started between Prime Minister George Papandreou and opposition leader Antonis Samaras. Papandreou has promised to quit when the coalition deal is reached.
Earlier in Asia, Japan's Nikkei 225 index fell 2.9 percent to 8,500.80 — a five-week closing low — and Hong Kong's Hang Seng dived 5.3 percent to 18,963.89.
Oil prices tracked equities in Europe higher — benchmark crude for December delivery was up $1.01 at $96.75 a barrel in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.
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