HOPES OF a “Greek miracle” calmed investor nerves yesterday, and lifted the Irish index in line with its Continental counterparts.

Markets opened down, but they steadied after German chancellor Angela Merkel retreated from demands that bondholders should shoulder a substantial part of the cost of a Greek rescue.

Expectations of a “Greek miracle” grew after the chancellor’s meeting with French president Nicolas Sarkozy, and sparked a rally across European markets, a Dublin broker said.

Dr Merkel confirmed she would work with the ECB to resolve the Mediterranean nation’s sovereign-debt crisis. “We would like to have a participation of private creditors on a voluntary basis,” Dr Merkel told reporters in Berlin yesterday. “This should be worked out jointly with the ECB. There shouldn’t be any dispute with the ECB on this.”

Mr Sarkozy said a “breakthrough” had been made on the Greek debt crisis, following his meeting with Dr Merkel.

Greece’s ASE Index surged 3.8 per cent, the largest gain of 17 western European markets trading yesterday. The Stoxx Europe 600 Index rose 0.2 per cent to 267.17 trimming the gauge’s drop this week to 0.4 per cent. Despite the optimism evident across equity markets yesterday, the euro zone’s finance ministers would have to “clutch victory from the jaws of defeat” when they meet tomorrow and on Monday if a second Greek bailout is to be agreed, the Dublin broker said.

“If they do pull it off, it really will be a miracle, because Greece is in a hell of a lot worse situation than us,” he said.

Banks across Europe advanced yesterday. Peripheral financial institutions were the standout gainers, with the Thomson Reuters Peripheral Banks index up 5.6 per cent, led by National Bank of Greece, BBVA and Banco Santander rising between 4.3 to 8.5 per cent.

Irish banking stocks AIB and Bank of Ireland also firmed fractionally, despite concerns expressed by EU competition commissioner Joaquin Almunia over the Government’s plans to create two “pillar banks”.

He warned that such a “duopoly” would require close surveillance as it could hamper competition in the Irish banking market.

Peripheral exchanges also featured among the top performers yesterday, with Spain’s Ibex 35 rising 2.2 per cent, Portugal’s PSI 20 up 1.5 per cent and Italy’s benchmark gaining 1.2 per cent.

Investors have recently sold-out of these exchanges on worries the Greek crisis could spread to other debt-laden countries such as Spain, Portugal and Italy.

The Iseq index advanced 0.75 per cent, while France’s Cac and German’s Dax gained 0.8 per cent apiece. – (Additional reporting Bloomberg and Reuters)