Singapore -- (SBWIRE) -- 12/02/2011 -- Indications that European officials are making progress toward tighter fiscal integration and other steps to address the region’s long-running debt crisis has triggered a rebound in risk appetite, lifting global equities and sinking the U.S. dollar. Euro zone finance ministers are set to agree on details of leveraging their EFSF bailout fund so it can help Italy or Spain should they need aid, and are likely to approve the next tranche of emergency loans for Greece and Ireland. Documents obtained Sunday showed the detailed guidelines for the European Financial Stability Facility (EFSF) were ready for approval by the ministers, opening the way for new operations and multiplying the fund's effective size.

The documents spell out rules for EFSF intervention on the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and its investment and funding strategies. The moves come as the Organization for Economic Cooperation and Development warned that the debt crisis was the “key risk to the world economy.” Chief Economist Pier Carlo Padoan called for “decisive action,” including a large rise in the capacity of the EFSF and greater support from the European Central Bank.

Investors have become too pessimistic to maintain the negative sentiment without bad news. Even perennially optimistic investment bank analysts began discussing armageddon scenarios. Asian stock markets, the first major bourses to trade following the weekend news from Europe, also rallied on hopes that the euro zone is making progress on containing its long-running crisis. If the Euro fails, bank lending would freeze, stock markets would likely crash and Europe's economies would crater. Nations in the eurozone could see their economic output fall temporarily by as much as 50 percent, according to UBS forecasters. The financial and economic pain would spread west and east as the U.S. and Asia get ensnared in the credit freeze and their exports to Europe collapse. The EFSF guidelines will clear the way for the 440 billion euro facility to attract cash from private and public investors to its co-investment funds in coming weeks.

Meanwhile, the financial contagion seems almost impossible to check as it spreads from one country to the next. Greece is in dire trouble, then suddenly the markets have doubts about Italy, then even Germany is having trouble borrowing at the low interest rates to which it has become accustomed. Over one 24-hour period last week, the credit ratings for Hungary, Portugal and Belgium were all downgraded.