The Irish Independent reports that Bank of Scotland (Ireland) yesterday unveiled a dramatic retrenchment, with plans to shut down its 44-branch Halifax network and other retail businesses, after its efforts to muscle into a 'third force' merger of the country's smaller lenders failed.
About 750 of BoSI's 1,600-strong workforce will be laid off as a result, the vast majority by compulsory redundancy. The bank, a unit of Lloyds Banking Group since its rescue takeover of HBOS in late 2008, had been carrying out a review of its operations since early last year. Lloyds has pumped almost €3.5bn into BoSI since then as loan losses on its estimated €12bn property and construction loan book spiral.
BoSI withdrew all Halifax retail products, such as mortgages, current accounts and personal loans, and intermediary products, including mortgages, motor finance and commercial asset finance, to new customers from yesterday. It will be writing to customers over the coming weeks to explain what steps they should take. All told, some €10bn of retail loans will be run down over time, even as the bank continues to honour the terms of existing loans.
Joe Higgins, chief executive of BoSI, insisted to the Irish Independent yesterday that the bank "remains very committed to its remaining 850 jobs and 12,000 business banking customers" -- a legacy of its 2001 takeover of state-owned industrial lender ICC. "It's a case of going back to the future," he said. He added: "It is our greatest area of expertise and one which has a deep and developed customer base. To focus on this business is the right strategy for the company and all stakeholders."
The SME loan book is estimated to stand at about €10bn.
Many of the property and development loans are now being managed in a so-called business support unit headed up by Robin Fanner, who was recently brought over from Lloyds.
Mr Higgins said the "sharp and sustained deterioration in the Irish economy", while the retail operations were still in a start-up phase, meant it it could not achieve break-even or profit in a realistic timeframe.
Target
He said that hitting this target was "dependent on a growing market and free availability of funding -- both of which are now gone for the foreseeable future".
BoSI unveiled an assault on the Irish high street at the height of the boom in 2005 when it acquired the ESB's 54-branch network around the country for €120m and started re-branding the locations under the Halifax banner. Mr Higgins abandoned a previous plan to make a similar announcement last summer, telling staff of a "significant development". It is understood that management believed at the time the bank could take part in consolidation among second-tier lenders.
BoSI approached the Government and was told to approach Irish Life & Permanent, according to sources, ahead of a second-stage deal with a combined EBS and Irish Nationwide, which are currently in formal tie-up talks.
BoSI chairman Maurice Pratt insisted yesterday that the review was spearheaded by Mr Higgins and the Irish management team, and not under the direction of Lloyds.
Some sources have suggested that Lloyds, which pumped a fresh €2bn into BoSI just before Christmas, ahead of its upcoming figures, had been lining up a London-based private equity firm to help participate in a tie-up between the Irish bank and Permanent TSB, a unit of IL&P.
It is understood that IL&P had made it clear in recent weeks that it was not willing to proceed with such a scenario. Both groups declined to comment.
The Irish Independent also reports that while Anglo Irish is often described as the 'developer's bank', Bank of Scotland (Ireland) was also a key lender to Ireland's once prosperous developers. Some of these clients are now likely to be nervous about the bank's future intentions.
With about €13.5bn of loans advanced to property developers, Bank of Scotland (Ireland) was the fifth largest funder of property development in Ireland, lending almost as much as Bank of Ireland.
In fact, according to a report last year by Bloxham Stockbrokers, the largest loan book Bank of Scotland (Ireland) possessed was in the area of property development, commercial property and land purchase. This loan book is now under great pressure and write-downs are likely to be severe.
While that is something to worry shareholders of Lloyds Banking Group and the UK Treasury, which owns Bank of Scotland, of more immediate concern for customers of the bank is how their accounts will be handled.
Developers who are in difficulty are now being handled by a part of the bank called the Business Support Unit (BSU). This unit is "responsible for managing customers who are most affected by the tough economic times''.
A huge number of development clients are likely to fall into this category, with the Minister for Finance once famously describing some developers as "hopelessly insolvent''. The bank will now use the BSU to ascertain which customers have a viable future and which do not.
The objective of the BSU is to return customers to "good health'' where possible, but of course it may not always be possible to revive some of the bank's customers.
Already some developer customers have gone public and admitted to their financial distress. For example, Bernard McNamara, a key borrower for the bank, has already said he is "broke''.
McNamara formed a key banking relationship with Bank of Scotland (Ireland) on the Burlington Hotel site in Dublin 4. The bank has a loan to that project worth €242m currently outstanding, though its not clear whether it will agree to roll the loan over for another period.
Another major customer of Bank of Scotland (Ireland) was developer Liam Carroll. He was such a large borrower from the bank it was often said, jokingly, that he had his own office at the bank's headquarters on St Stephen's Green.
Last summer, when Carroll's Zoe Group of companies was seeking court protection after running up debts of €1.1bn, it was disclosed that, apart from AIB, Bank of Scotland (Ireland) had the largest exposure, reported at that time to be €324m.
Other developers and builders the bank has loaned to include the Fleming Group, which also got into financial difficulty in recent months.
Property developer Larry O'Mahony, and former IRA man and now developer Tom McFeely have also been involved with companies who've successfully borrowed from Bank of Scotland (Ireland), although there is no suggestion that either of them are not repaying any loans.
The Irish Times reports that further falls in consumer spending have been predicted for this year after new figures confirmed that 2009 was a difficult year for retailers.
Retail sales fell 14.1 per cent last year, according to the Central Statistics Office (CSO), prompting industry group Retail Ireland to describe 2009 as “clearly the worst year experienced by the sector in living memory”. The value of the total goods sold was 18 per cent lower than in 2008, the CSO said.
There was little respite for retailers in the run-up to Christmas, with the volume of core retail sales (which exclude cars) declining almost 1 per cent compared to November in what is the peak gift-buying season.
The CSO data confirms that the sluggish sales had prompted discounting during December, with the value of core sales declining 1.5 per cent during the month.
On an annual basis, the volume of sales, including the motor trade, was 7.5 per cent lower in December 2009 than in the previous December, while the value of the sales was down 12.5 per cent.
Retail Ireland, a group affiliated to employers’ body Ibec, repeated calls for Government assistance.
“It is vital that Government assist the retail sector in every possible way to achieve comparable reductions in its cost base,” said its director Torlach Denihan.
The retail body is seeking a 10 per cent rebate on commercial rates paid in 2009 and is also seeking Government intervention in the rental market. Pressure on the industry intensified as the year progressed, he said.
“The issues from 2009 have not gone away and excessive business costs related to rent, rates, service charges and labour are still impeding overall stability in the sector,” said Retail Excellence Ireland’s David Fitzsimons.
Ulster Bank economist Lynsey Clemenger forecast a further decline of 1 per cent in consumer spending in 2010, after an expected 7.5 per cent deceleration in spending last year, while Bloxham economist Alan McQuaid said he expected spending on goods and services to fall 1.8 per cent this year.
Retail sales account for half of consumer spending, while spending on services accounts for the other 50 per cent.
Davy analyst Rossa White concurred that more pain was to come for retailers, noting that the data suggested that the overall economy did not reach a bottom at the end of 2009.
“Total sales have bottomed only because of the intra-year recovery in car sales since the total collapse in the first quarter of 2009,” he wrote in a note yesterday.
The motor trade has been one of the worst hit by declining sales volumes, recording a fall of 15.1 per cent in the year to December. However, retail weakness has been seen across all sectors.
The decision of several major traders to open on St Stephen’s Day could not salvage Christmas for department stores, which saw a near 2 per cent decline in sales volumes compared to the previous December.
Sales of food, beverages and tobacco fell almost 7 per cent over the period, indicating a leakage of sales to Northern Ireland. Spending on discretionary and big-ticket items such as furniture also endured double-digit declines during 2009, although there were signs of stability in evidence in some categories later in the year.
Attempts by retailers to entice shoppers to buy again were in evidence in the CSO’s clothing, footwear and textiles category, where sales dropped 1 per cent on an annual basis in terms of volumes, but plunged 14.1 per cent in terms of value. This reflected both heavy discounting and the decision by some retailers to pass on the effects of a weaker sterling to euro customers.
The Irish Times also reports that politicians and funding agencies should not measure the value of science and technology research investments by swiftly-produced intellectual property (IP) portfolios, former Intel chairman and chief executive Craig Barrett said yesterday.
Speaking at Intel Ireland’s Leixlip headquarters, Dr Barrett claimed politicians and funding bodies internationally were short-sighted in expecting quick results and an IP portfolio after only a few years of funding a project.
This has been the measuring stick used by political committees and funding bodies in Ireland in the past. “One thing that’s short in a democracy is patience. The government, the funding entities, have to have patience, seeing this through not just one electoral cycle. The politicians want to see an ROI [return on investment] in just a few years,” he said.
Likewise, he said it would take time to build up university research institutions and a broad base of strong indigenous technology companies.
“I frankly think it’s difficult for politicians to grasp this if they haven’t gone through this,” he said. “Silicon Valley didn’t happen overnight. MIT [the Massachusetts Institute of Technology] didn’t happen overnight. There has been a building of those entities. It’s a very complex equation, making this happen.”
Maintaining research funding was particularly important, not just for corporations to keep their competitive edge but for competitive nations in a global market, too. “At Intel, the one thing that never decreases is the RD budget. If you slice it by 10 to 15 per cent, you know your future is mortgaged. Nations have to start realising this too.”
He said that Ireland would need to shift from reliance on outside investment and build on its base of multinationals to create an indigenous technology sector.
“Ireland was swamped with FDI [foreign direct investment] for 10 years and that grew the tech sector,” he said, but this could not be a long-term strategy. “The ultimate game has to be spinning off people and ideas and that will create high-paying jobs on the edge of technology.”
The Irish Examiner reports that four out of five defined benefit pension schemes were in deficit at the end of 2009 as investments and funding proved "too aggressive".
This means just over 200,000 members of defined benefit schemes faced losses on their retirement nest eggs at the end of last year.
In its annual review, the Pensions Board said it is very concerned with the effect on defined contribution and defined benefit schemes of investment losses since 2007, especially defined benefit schemes’ obligation to tackle deficits.
It said it is concerned that the investment and funding of too many defined benefit schemes are based on aggressive investment return assumptions and do not take enough account of investment risks. Defined benefit scheme funding needs to be sustainable for the long term, it said, adding that trustees must consider realistic costs, investment risks and the ability and willingness of the employer to support the scheme.
At the end of 2009, there were 853,397 members in 84,226 occupational pension schemes, an increase of 4,189 on 2008. There were 169 suspected cases of deduction and non-remittance of pension contributions by employers in the construction sector reported to the board in the year.
Pensions Board chief executive Brendan Kennedy said: "Much of the work of the Pensions Board in 2009 was a direct or indirect result of the Irish and global economic crises. The problems for pension savings continued last year, despite good investment returns.
"What determines whether a pension scheme can meet its obligations is not regulation, not the funding standard, but the prudent management of that scheme by its trustees and the support of the sponsoring employer on an ongoing basis. It is vital that the promises made to scheme members are realistic and deliverable."
The board said it is "acutely aware" of the complex industrial relations and protracted negotiations schemes are involved in while tackling deficits.
During 2009, the board issued on-the-spot fine notices of €2,000 each to 51 trustees of 18 schemes. It said 16 schemes were fined for failure to submit or late submission of actuarial funding certificates.
There was one prosecution for failure to submit an actuarial funding certificate and two prosecutions for failure to remit pension contributions deducted from employee’s wages.
There was also a 20% increase in visits to the Pensions Board website, www.pensionsboard.ie, to 601,419 last year.
The review said there were 170,862 PRSA contracts with total assets of €2.05 billion at the end of 2009, an increase of 15,230 contracts and €850 million in assets since 2008.
The Financial Times reports that Hector Sants has resigned as chief executive of the Financial Services Authority, sowing confusion about the direction of financial regulation.
Mr Sants, who was appointed chief executive in 2007 led the City regulator through a period of turmoil. With the agency under fire for failing to prevent the financial crisis, he reshaped it into a more combative, intrusive regulator and became a vocal advocate for international banking reform.
The CEO, who will stay at the FSA until the summer, has been outspoken in his criticism of Conservative proposals to dismantle the agency. He described the Tory plan to give the FSA’s supervisory role to the Bank of England and spin out consumer protection responsibilities to a new agency as a distraction that could lead to a “turf war”.
However, George Osborne, shadow chancellor, praised Mr Sants, 55, on Tuesday, calling him an “intelligent, diligent and committed public servant”.
The Tories let it be known they would be interested in recruiting Mr Sants for another job if they win the election. “As far as George is concerned, this is not the end of [Mr Sants’] public sector career,” said an aide. Speculation centred on a post at the Bank or a minister’s role relating to financial services or negotiating with the European Union in Brussels.
Mr Sants said in a statement that he had always planned to serve a single three-year term. The former Credit Suisse investment banker has told friends he has no particular plans.
Friends said another public sector job or something at a boutique bank might beckon.
“I am very proud of the manner in which the FSA rose to the challenge of dealing with such unprecedented turbulence across global financial markets. Moreover, I believe the FSA candidly examined the failings in financial regulation that contributed to the onset of the crisis, learnt the lessons and has gone on to reform itself into a much stronger and better equipped organisation,” Mr Sants said.
Uncertainty over the FSA’s future could make it difficult to recruit a successor and could reduce Britain’s influence at a time when global regulators are debating tougher rules.
Some in the City were disappointed by the move. “He was probably the best person to take the FSA forward in the next year or two,” said Jan Putnis, partner at Slaughter & May.
If the Tories win and push forward with their reform plans, a merged regulator would take months, if not years to establish. It is also not clear what role would be played by Lord Turner, FSA chairman, who is well respected internationally.
International regulators have also praised Mr Sants. “Hector was a very important counterpart at a critical time in the evolution of the UK and US capital markets,” said Mary Schapiro, chairman of the US Securities and Exchange Commission.
Sally Dewar, the FSA’s managing director of risk, was seen as the strongest internal candidate to replace Mr Sants, senior FSA officials said. Jon Pain, managing director for supervision, is also highly rated.
The FT also reports that Toyota has mounted an aggressive but belated lobbying campaign in Washington to repair its image in the wake of the damaging vehicle recalls and doubts over the safety of its vehicles.
The carmaker has asked its dealers to press its case on Capitol Hill and by inviting politicians to visit their dealerships.
A group of about 50 dealers was due to come to Washington this week but snowstorms have forced a change of plan.
Akio Toyoda, Toyota’s chief executive, wrote in Tuesday’s Washington Post that “we know that we have to win back the trust of our customers by adhering to the very values on which that trust was first built”. The carmaker has also launched a series of TV ads making a similar point.
The lobbying campaign comes ahead of potentially damaging Congressional hearings on the cause of unintended acceleration in some of Toyota’s most popular vehicles as well as the federal government’s response to the issue.
The first hearing, before the House committee on oversight and government reform, was due to take place this afternoon but has been postponed because of the blizzards that have hit Washington. It is scheduled for February 24. The House energy and commerce committee is due to hold a similar hearing on February 25.
Toyota has built a strong political constituency as its North American operations have grown, especially in southern states where most of its plants are situated, and on the east and west coasts, where it has been most successful in displacing the three Detroit carmakers in the marketplace.
While observers have been watching for signs that the backlash against Toyota on Capitol Hill has an “anti-foreign” dynamic, some say there is so far little evidence that Toyota’s roots in Japan are an issue.
“It is not accurate to say that any concerns regarding Toyota’s current problems are being done in a xenophobic way,” says Nancy McLernon, president of the Organisation for International Investment, which lobbies on behalf of US-subsidiaries of foreign companies.
“It is not unheard of that as the dust on this problem settles, that some might point a foreign finger at the company. But my gut feeling now is that the government response would have been no different had this happened to Ford.”
Even so, many Americans resent Toyota and other Asian carmakers’ success in wresting market share from Detroit. The Detroit carmakers – General Motors, Ford Motor and Chrysler – have led a protest against Japan’s cash-for-clunkers vehicle scrappage scheme, which discriminates against imported vehicles.
Toyota’s initially slow and confused response to the safety issues has compounded its challenge on Capitol Hill. “When they had this situation, there was no agility or flexibility in their US operations to respond,” one car industry lobbyist says. “Once that feeding frenzy starts, it’s hard to dial it back.”
Cody Lusk, president of the International Automobile Dealers Association, which includes Toyota retailers, said that “the dealers want their members of Congress to be aware of what’s happening at the real-world level”.
Mr Toyoda acknowledged in his Washington Post piece that “we also are putting in place steps to do a better job within Toyota of sharing important quality and safety information across our global operations. This shortcoming contributed to the current situation”.
Toyota will have to balance efforts to defend its reputation and restore consumer confidence while appearing contrite and ready to fix technical failures. So far, those members of Congress whose districts include Toyota factories, have not rushed to the defence of the carmaker, though they have signalled concern about declines in production resulting from the recalls.
As part of its drive to underline its importance to the US economy, news releases have noted that the company and its dealers employ 172,000 people. They previously referred only to the 34,000 who work directly for the carmaker.
The two Congressional committees are expected to quiz National Highway Traffic Safety Administration officials about documents that show they were warned about acceleration problems in 2008.
In one case, according to memos obtained by Politico, the news website, the safety regulator failed to act on complaints due to “limited resources”.
In a memo ahead of the hearing, Democratic congressional staff said there appeared to be a “growing body of evidence” that neither Toyota nor the NHTSA had identified all of the causes of the acceleration trouble and that remedies so far “have failed to solve the problem”.
Besides shining a light on Toyota, the hearings could affect other carmakers by calling for tighter regulatory standards for critical automotive components. Congress may also propose earmarking more resources for the NHTSA.
The New York Times reports that Ben S. Bernanke, having survived a surprising challenge to his second term as Federal Reserve chairman, now faces the delicate task of beginning to pull the central bank out of its extraordinary effort to prop up the economy.
The main question is when and how the Fed should start raising short-term interest rates, which have been at a record low for more than a year. Related is the issue of how to manage, and eventually shrink, the record $2.2 trillion balance sheet that the Fed amassed as it pumped vast sums of money into the economy, starting in 2008. On Wednesday morning, the Fed will release a statement outlining Mr. Bernanke’s views on moving away from its exceptionally easy monetary policy.
As a policy tool, Mr. Bernanke is expected to consider a little-known mechanism — referred to as the interest rate on excess reserves — that gives the Fed leverage over $1.1 trillion in bank deposits.
Most of those deposits were created as the Fed gobbled up mortgage-backed securities and Treasury notes and bonds during the financial crisis. The banks in turn parked the funds at the Fed as reserves. In the months and years ahead, the Fed wants to make sure that banks do not reduce their reserves too quickly, because it could create inflationary pressures as banks step up their lending.
To achieve its goal, according to Fed officials and speeches, the central bank will raise the interest rate on excess reserves, now 0.25 percent. It also plans to lift its target for the fed funds rate — what banks charge one another for overnight loans and the centerpiece of its policy statements since 1994. But officials stress that rates will remain quite low for months to come.
“We’re in a different situation than ever before, and the tools we are using are entirely new,” said Lyle E. Gramley, a former Fed governor who now works at the Potomac Research Group, an investment advisory firm.
Mr. Gramley predicted that Mr. Bernanke would try to reassure the markets that the new tools would work. “There’s an awful lot of talk that we’re going to have inflation down the road,” he said. “But this Fed is determined to maintain price stability. They’ve said that over and over again, and they want to communicate that to the markets.”
Mr. Bernanke has used the term “exit strategy” to describe his task. Much like the American military’s withdrawal from Iraq, the Fed’s plan has few precedents and carries much uncertainty. At a minimum, officials have signaled, it will have to be carried out delicately, be flexible when circumstances change, and, most likely, be gradual.
With unemployment at 9.7 percent, the Fed may be months away from raising rates, but it is discussing the plan now to prepare the markets and tamp down inflation fears, said Vincent R. Reinhart, a former director of monetary affairs for the Fed.
“The reason they’re starting to talk about the exit now is to reassure investors, so that they aren’t pressed to head for the exit prematurely,” said Mr. Reinhart, now a scholar at the American Enterprise Institute. “Chairman Bernanke has to walk a very, very fine line.”
If the Fed raises interest rates too hastily, it could choke off the fragile recovery. If it dallies, it might set off market jitters about rising prices.
But that decision occurs in the context of an economy whose normal rules have been reshaped. As Mr. Bernanke put it in a speech last April, “we no longer live in a world in which central bank policies are confined to adjusting the short-term interest rate.”
The Fed’s balance sheet has nearly tripled since the summer of 2007. At the end of that year, the Fed found new ways to lend to banks, and in early 2008, it began to cut interest rates aggressively, pushing the target rate for fed funds to nearly zero in December 2008.
By that month, the Fed’s balance sheet had ballooned to $2.2 trillion as the central bank doled out loans to commercial banks, issuers of commercial paper and foreign central banks. The American International Group, the bailed-out insurance giant, and JPMorgan Chase, which bought Bear Stearns, also received aid.
Many of those programs are winding down. Two of the biggest — the Fed’s purchase of $1.25 trillion of mortgage-backed securities and of about $175 billion in debts guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae — are to be completed by March 31.
The Fed in essence created new money to buy those securities, and now holds $1.1 trillion in reserves that the banks can demand when they wish. “The Fed’s great worry is that instead of holding onto these reserves, the banks would decide they’d rather take the money they’re tying up and lend it out,” said Anil K. Kashyap, a professor of economics and finance at the University of Chicago’s business school. If they did that, “you’d see broad measures of money growing quickly, and presumably that would be the start to having some inflation.”
In the short term, that prospect seems remote, as banks have been wary and tightfisted in lending since the financial crisis erupted. But in the long run, a huge balance sheet carries risks.
The ability to charge an interest rate on excess reserves was created in 2006, after decades of discussion, when Congress granted the Fed such authority. (One reason it took so long is that the interest payments will reduce the amount the Fed turns over to the Treasury each year.) The tool — which is used by other central banks, like those in England and Canada — was to become available in 2011, but Congress moved up the date during the crisis. The Fed started paying the interest in October 2008.
Mr. Bernanke has argued that the new rate will eventually serve as an interest-rate floor, with the discount rate — the rate at which the Fed lends directly to banks — functioning as the ceiling, and the fed funds rate fluctuating in between them.
Looking longer term, Mr. Bernanke has four other tools that could be used gingerly to tighten monetary policy. The first is reverse repurchase agreements, or reverse repos, in which the Fed would sell securities from its portfolio with an agreement to buy them back at a slightly higher price at a later date. The second is term deposits, analogous to the certificates of deposit banks offer to customers. Third, the Treasury could sell bills and deposit the proceeds at the Fed.
Finally, the Fed could sell some of its long-term securities, including those backed by mortgages, taking more money out of the system. That strategy would carry risk given that the Fed’s ownership of such securities is helping keep mortgage rates low and support the housing market.
Mr. Bernanke’s statement was initially to be presented at a House hearing scheduled for Wednesday. After the hearing was postponed because of snow, he decided to release it anyway.
The NYT also reports that hopes that the wealthy nations of Europe would come to the aid of Greece galvanized financial markets on Tuesday and, for a day at least, soothed fears that the economic troubles on the fringes of the Continent might spread.
With the eyes of the financial world on Greece and other deeply indebted nations, European Union leaders are discussing what once seemed unthinkable: bailing out their profligate neighbors.
Despite a cacophony of conflicting reports, a consensus seems to be emerging on both sides of the Atlantic that wealthier nations, notably Germany and France, will aid Greece and possibly other countries like Portugal rather than risk an escalating crisis that could jeopardize Europe’s monetary union. Indeed, many market participants expect a deal to be reached in days — a hope that, if dashed, could set the stage for a new round of market volatility.
“There is pressure to deliver something,” said John R. Brady, a senior vice president of MF Global, an investment firm.
After three tough days for markets, whispers that a rescue for Greece might be near touched off a broad rally in European stocks, bonds and in the euro, which had come under intense pressure in recent weeks. The gains quickly spread to Wall Street, where the Dow Jones industrial average rebounded above 10,000, rising 150.25 points, or 1.52 percent, to 10,058.64. The Standard & Poor’s 500-stock index rose 13.78 points, or 1.3 percent, to 1,070.52. The Nasdaq composite index gained 24.82 points, or 1.17 percent, to 2,150.87.
The debts of the poorer members of the European Union have cast doubt over the future of the euro and raised concern that, like so many strapped banks before them, some of European Union nations might need to be bailed out. The financial pressure on these countries — notably Greece — has been building for weeks, and the tensions reached new heights last week.
But the cascade of losses began to reverse itself on Tuesday as several European officials suggested that the European Union would step in to avert a crisis, and the governments of Greece and Portugal vowed to carry out austerity measures in an effort to win back the confidence of shaken bond investors.
The Greek stock market surged 5 percent, and the nation’s beleaguered government bond market also rallied. The euro strengthened 0.7 percent against the dollar, to $1.3775.
The leaders of the 27 European Union countries will meet on Thursday to tackle, among other things, Greece’s swelling deficit, which remains about 13 percent of gross domestic product.
But exactly what will come out of that meeting remains unclear. European leaders may take a symbolic route and try to restore confidence by backing loans in Greece and elsewhere. Or they may decide to unveil a more sweeping bailout plan for weaker nations, with the help of the Continent’s better-off nations.
“This will be further discussed in the coming days,” said Olli Rehn, who is about to take over as European economic affairs commissioner. “We are talking about support in the broad sense of the word.”
In an interview at his home in Lisbon, Portugal’s prime minister, José Sócrates, rejected outside help entirely. “We don’t need anything from Brussels,” he said. “We know exactly what we will do. We don’t need any help; we will solve our problems.”
The enthusiasm among investors on Tuesday was started by reports that Jean-Claude Trichet, the European Central Bank president, would leave a conference in Australia early to attend the summit meeting on Thursday.
But just as markets began to froth, central bank officials played down the significance of his itinerary. A spokeswoman for Mr. Trichet said he had planned to attend the meeting even before he left for Australia.
“It was pure logistics,” the spokeswoman said, declining to comment on whether Europe was moving closer to a bailout of Greece.
A person in the German government with knowledge of the negotiations confirmed that Germany was involved in direct consultations with the other 15 countries that use the euro over possible ways to help the Greek government. But the individual, who spoke on the condition of anonymity because he was not authorized to discuss the plans, said any action would take place “within a European framework.”
“It’s just about finding a way to potentially give Greece a little breathing room,” he said. He dismissed reports that Germany was considering a unilateral aid package for Greece. “The idea that we would go it alone is completely nuts.”
A spokesman for Angela Merkel, Germany’s chancellor, said it was “wrong” that Berlin had already decided to provide financial assistance to Greece.
In the United States, Wall Street welcomed its winning day after weeks of volatility. The Dow remains about 6 percent off of its late January highs, and its close below 10,000 Monday delivered a psychological setback to those who hoped for a steady rebound.
Philip J. Orlando, chief equity strategist at Federated Investors, said a bailout plan for Greece would provide a blueprint for rescue if other countries began to reel. “Some of the overarching fears of global contagion will then begin to recede,” he said. “Greece is first and foremost the touchstone.”
The near-term direction of the market will depend on whether the European Union’s actions on Greece adequately quell fears among investors, analysts said. They remain concerned by the possibility of a series of defaults, which could raise the cost of lending around the world and slow the broader economic recovery.
Rumblings of a bailout plan sent the cost of insuring Greek debt down sharply — about 19 percent — as investors grew more confident that the government would be able to repay its debt. The cost to insure Spanish, Portuguese and Italian debt fell by similar margins.
Investors have grown wary of the feeble public finances of a number of countries that use the euro — particularly Greece, Portugal, Spain and, to a lesser extent, Italy — raising fear that the entire currency system could come under attack.
United States Treasurysecurities, which had gained over the last week as investors sought shelter from the financial turmoil in Europe, tumbled on Tuesday as those earlier trades were reversed. The Treasury also sold a record-tying $40 billion of three- year notes, further depressing the bond market.
The Treasury’s 10-year note fell 21/32, to 97 26/32. The yield rose to 3.65 percent, from 3.56 percent late Monday.
