US, eurozone breathe easier as markets rebound

Pressure eased on the fiscally embattled US and eurozone governments Tuesday as market interventions and a dovish Federal Reserve statement kept borrowing rates low and helped stock markets rebound.

After meeting on the weaker-than-expected US economy, the Fed's policy board vowed Tuesday to keep interest rates at ultra-low levels for two more years in a signal that it had not given up trying to refuel growth.

Coming with a warning that the US economy faced increasing "downside risks", the policy move served to send yields on US bonds plunging almost to the record low of December 2008, the height of the financial crisis.

That countered any worries that Standard & Poor's downgrade of the US credit rating last Friday would increase the country's borrowing costs in the short term.

Meanwhile the US stock markets surged back after Monday's rout, the Dow rebounding nearly four percent and the Nasdaq 5.3 percent.

Earlier Europe's markets also mostly rebounded, with the exception of Germany's bourse, with the DAX index paring 0.1 percent.

The Dax was hit in part by new data on Europe's strongest economy showing that German exports fell in June by 1.2 percent, cutting into its still-strong trade surplus.

Pressure lightened on Europe's fiscally embattled governments, after the European Central Bank stepped up its intervention.

The yield on Spanish and Italian bonds eased to 5.063 percent and 5.202 percent respectively from 5.138 percent and 5.277 percent late on Monday, as the ECB was understood to be buying in the market.

ECB president Jean-Claude Trichet scolded governments, urging them to cut public deficits and restore sound finances.

"We expect governments to do what we consider to be their work, their duty," he told Europe 1 radio in France.

Under ECB pressure Italy readied its new budget cuts.

Government ministers were set to meet trade unions and big business representatives on Wednesday to discuss budget-slashing reforms including a controversial overhaul of labor legislation and social welfare payments.

In Spain, Finance Minister Elena Salgado said she expected Europe to hold a meeting on the financial crisis in early September.

"We have been holding telephone conversations and we will no doubt hold a meeting in the first days of September," she said when asked if there would be a European crisis meeting.

"I hope it will not be necessary to have it earlier but if it is, we are all available for that," the finance minister told Onda Cero radio in an interview.

In France, Budget Minister Valerie Pecresse said the country was sticking to its target of reducing its public deficit to 4.6 percent of GDP next year and was ready to do everything necessary to achieve that goal.

"We will not deviate by one iota from our target of improving our public finances," she told RTL radio.

Meanwhile, the head of the Vatican bank criticized "harmful" European bailouts of debt-stricken economies and "self-limiting" US policies to promote growth through debt.

Ettore Gotti Tedeschi, head of the Institute for Works of Religion, the Vatican state bank which manages the accounts of major Catholic religious orders, said private savings should be used to boost growth instead of cutting debt.

"If resources have to be taken away from families, why not immediately use them to promote economic growth? Why use them to reduce debt?... It is 1,000 times better to use them for growth," Gotti Tedeschi told Vatican radio.