The FTSE 100 Index was 78 points higher, or 1.4%, after politicians agreed at a summit in Brussels that struggling banks could have direct access to the EU’s bailout fund without adding to Government debt.
The improved sentiment helped lift most UK banking stocks, which suffered severe losses yesterday amid fears that a rate-rigging scandal uncovered at Barclays was set to spread to other lenders.
RBS, Lloyds and HSBC added nearly 3% but Barclays remained under pressure, falling 1%.
Ishaq Siddiqi, market strategist at ETX Capital, said: “Leaders have drummed up measures to ease worries over sovereign debt and banking troubles.”
The importance of recapitalising banks was underlined when Spain asked for 100 billion euros for its beleaguered industry.
Under previous rules, the bailout loan had to be made to the government, which would then lend it on to the banks.
But having that debt on the government’s books spooked investors,
who began demanding higher interest rates for lending money to the government.
The agreements in Brussels suggest Germany is willing to move on its tough stance on forcing reforms in exchange for rescue money and borrowing costs for struggling eurozone countries are likely to come down.
The yield on 10-year bonds in Italy and Spain fell to 4.5% and 5.8% respectively, away from the unsustainable 7% mark which pushed Greece, Portugal and Ireland into taking a bailout.
In addition, the leaders agreed that EU countries that were following strict budget rules could still apply for bailouts that would not come with the stringent conditions that have accompanied previous emergency loans.
The leaders of the 17-nation eurozone also agreed to a joint banking supervisory body.
Rebecca O’Keeffe, head of investment at Interactive Investor, said: “The jubilation with which the markets have greeted the agreement does appear to highlight how it is better to have low expectations for European summits. That way, you can at least be positively surprised.”