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European Stocks Recover as Panic Over Portugal Banks Subsides

LONDON ( The Deal) -- European markets recovered some of their mojo Friday following Thursday's rout, as some of the panic over contagion from the troubled Portuguese Espirito Santo Financial Group began to subside. The main worry -- which also sparked a fall in Tokyo overnight -- concerned the exposure of Portugal's no. 2 commercial bank, Banco Espirito Santo, to the group's wobbles. By extension, would Portugal have to bail the bank out with taxpayer money, and would the troubles of the eurozone's weakest economies return with a vengeance? The bank's shares were suspended from trading on Thursday, after falling 17%.

But while BES shares remain suspended this morning, the Portuguese central bank and BES itself have tried to reassure the markets. BES, which is only 25% owned by the Espirito Santo Financial Group -- and 14% owned by French bank Credit Agricole -- said its exposure to the group is limited to 1.18 billion euros ($1.6 billion) and does not compromise its compliance with regulatory capital requirements. Earlier this year, the bank had a capital buffer of 2.1 billion euros above the mandatory minimum and has raised more than 1 billion euros in a further rights issue since that figure was announced.

London's FTSE 100 was up 0.21% at 6,686, Frankfurt's DAX index was up over 0.02% at 9679.85 and in Paris, the CAC 40 was up 0.51% at 4,323.

In London, the mood was lifted by an announcement from Imperial Tobacco Group that it is in talks with the U.S. tobacco groups Reynolds American (RAI - Get Report) and Lorillard (LO) to acquire certain of their cigarette brands. Imperial's statement implied that reports of an impending merger between the two American rivals -- to create a company with a market capitalization of $56 billion -- were largely correct. Imperial's share price was up over 3% at 2,743 pence. U.K. rival British American Tobacco (BTI), which has been buying back shares, was also up close to 1%.

In Germany, defense group Rheinmetall rose over 4%, following a report in the respected Handelsblatt newspaper that it was hoping to block plans for a politically sensitive merger between its German rival, Leopard Tank-maker Krauss-Maffei Wegman and French defense group Nexter. The report said Rheinmetall was working on an offer of its own for Krauss Maffei.

In Tokyo, the Nikkei 225 was down 0.34% at 15,164.04, while in Hong Kong the Hang Seng Index closed down 0.02% at 23,233.45.

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