The European Central Bank, Germany's constitutional court and China's pension fund gave a triple boost to efforts to stabilize the euro zone on Thursday, lifting the single currency and European stocks.
The ECB said it would provide unlimited liquidity to banks until the end of this year and press on with its policy of buying euro government bonds since euro zone credit markets were still not functioning properly.
The highest German court rejected a lawmaker's plea to block the 440 billion euro ($529.7 billion) European Financial Stability Facility created by the 16 euro zone governments to lend money in emergency to states shut out of credit markets.
The euro gained more than 1 percent against the dollar after the head of China's national pension fund said the single currency would weather Europe's debt crisis.
Dai Xianglong, chairman of the $114 billion Chinese National Social Security Fund said the euro would gradually stabilize and that the U.S. fiscal deficit remained a big concern.
In Spain, one of the euro area states under market scrutiny, marathon negotiations to overhaul the rigid labor market collapsed, leaving a fragile government to impose looser hire-and-fire laws without trade union backing.
But bond markets snapped up a new Spanish 3-year benchmark issue, albeit at a premium, helping to support the euro and Spanish stocks.
That and an earlier auction in Portugal showed that fiscally stressed southern euro zone countries -- potentially backed since Monday by the credit guarantees from euro zone governments -- can still access the credit markets.
The head of the World Bank earlier cast doubt on Europe's ability to surmount its sovereign debt crisis without restructuring liabilities of heavily indebted countries such as Greece -- a step euro zone leaders are refusing to contemplate.
Euribor interbank lending rates climbed above the European Central Bank's (ECB) benchmark interest rate for the first time in seven months on Thursday in a sign of persistent reluctance of banks in the euro area to lend to each other.
As expected, the ECB left interest rates at 1 percent on Thursday and the Bank of England also kept rates unchanged.
TRICHET SILENT ON BOND DETAIILS
ECB President Jean-Claude Trichet declined to give any details of the nationalities or quantities of bonds purchased beyond a general weekly total announced by the central bank, nor to say how long the program would run.
After explaining the controversial move became necessary when credit markets seized up on May 6-7, he added: We consider, at the moment I am speaking, that it is appropriate to continue to do what we have decided (and buy bonds).
Quizzed about German ECB Governing Council member Axel Weber's public criticism of the decision, Trichet said: There is one currency, there is one ECB, there is one Governing Council and ... there is only one decision.
In Spain the failure of talks with employers and unions left Prime Minister Jose Luis Rodriguez Zapatero's minority Socialist government seeking allies among regional parties to enact new labor laws without a social consensus at a time when his high-deficit country is already under financial market pressure.
Economists consider labor market reforms, along with bank restructuring and reducing a budget deficit that is above 11 percent of national output, essential to solving Spain's longer-term economic problems after a deep recession.
A top financial source said on Wednesday that smaller Spanish banks were losing access to European credit markets due to concerns that Spain could be heading for a crisis along the lines of Greece, although its public debt is far smaller.
Fellow euro zone weakling Portugal attracted strong demand at a bond auction on Wednesday and ruled out needing to draw on the euro zone rescue package.
Lisbon had to pay a higher yield of 5.225 percent on its 10-year bond, well above May's 4.523 percent, at a time when benchmark German bond yields are at a record low.
In the Netherlands, a virtual dead heat in Wednesday's general election between right-wing Liberals, who advocate stark budget cuts, and the center-left Labor Party, which wants less austerity, raised the prospect of months of policy deadlock.
The Liberals won a fragile one-seat lead, putting them in pole position to form a coalition that must tackle a ballooning budget deficit in the fiscally conservative euro zone country. But negotiations are set to be long and complex, with at least three parties required to form a majority.
World Bank chief Robert Zoellick challenged a European taboo in a speech in Berlin on Wednesday evening by saying a managed restructuring could raise confidence in financial markets if a euro zone country were unable to pay its debts.
The uncertainty about who will pay and how they will pay can exacerbate and spread fears -- sweeping along other countries, or banks, that would otherwise be able to manage given discipline and time, he said.
One needs to consider these issues carefully, case-by-case. If it becomes clear that a particular debtor cannot pay back its borrowings, a managed restructuring, combined with financial support, can create confidence that growth can be restored, Zoellick said according to a prepared text.
European Union governments and the ECB have insisted there is no question of any euro zone country having to reschedule or reduce its debt mountain, including Greece, which received a euro zone/IMF bailout last month.
Greece's debt stands at 120 percent of gross national product and is projected to rise to 145 percent in 2013, while its economy is expected to contract further.
(Additional reporting by Gilbert Kreijger in Amsterdam, Paul Day in Madrid, Paul Carrel in Berlin, Sergio Goncalves and Andrei Khalip in Portugal; writing by Paul Taylor, editing by Jason Neely)