In perhaps the most dramatic effect of Europe's drive to a single currency, small investors across the continent's southern fringe are fuelling a stock market boom in a new scramble for better returns as yields on state-backed bonds dive.

And governments are taking advantage to sell off state-held companies and adapt to the free-market ethos of the common European currency, which will be launched on January 1, 1999.

The state sell-offs have routinely been over-subscribed and brought thousands of debut investors to the markets, generating excitement and pushing share prices up in the groups as a heady new equity culture takes firm root across the South.

Spain - where conservative investors for years counted on returns of well above 10 per cent from state-backed debt - has spearheaded this quiet revolution in investmentpatterns.

Small investor demand has already ensured the success of the nearly $8 billion sale of Endesa, Spain's largest privatisation.

Mid-way through the giant utility's final privatisation, the retail tranche - which has been raised to represent 77 per cent of the overall sale - is 4.6 times over-subscribed.

More than 1.3 million small investors have placed orders for more than 3.7 trillion pesetas ($24.5 billion), putting it well on track to becoming the most widely held Spanish share.

Before the sale began, chairman Rodolfo Martin Villa said that Endesa would win 400,000 new small investors in this sale. This would lift its total small shareholder base to two million, surpassing telecommunications giant Telefonica.

This follows the two hugely successful sales of the tobacco monopoly Tabacalera and the banking group Argentaria earlier this year, key steps in Spain's drive to privatise all state non-mining interests by the year 2000.Small investor demand reached four trillion pesetas for the mostrecent sale, Tabacalera. They bid 5.5 trillion for the state's remaining 29 per cent of Argentaria.

This hefty appetite is not expected to abate and may actually increase, after a sharp drop in key Spanish money market interest rates which have plunged from 9.25 per cent in December 1995 to 4.25 per cent currently.

``This is a new and very important phenomenon, and the pace (of small shareholder investment) is accelerating,'' said a top Spanish executive.

In Spain, just 10 per cent of the some 30 trillion pesetas investment funds are invested in equity, compared with 30 per cent on the continent as a whole and 60 per cent in the US or Britain.

This story is repeated across Europe's southern tier, where governments have worked to clean up finances, cut inflation and stabilise currencies - leading to a sharp drop in interest rates and yields ahead of economic and monetary union.

Spain, Italy and Portugal belong to the 11 countries which will launch the single currency. Greece has not yet met theeconomic requirements and will miss the start-up.

This year alone, blue-chip Spanish and Italian indices have risen nearly 40 per cent. The Portuguese index is up nearly 50 per cent and the Greek has soared 80 per cent - that compares with a German rise of just above 30 per cent.

And so, while privatisation activity in much of Europe is low-key, in Italy, Greece and Portugal governments are accelerating privatisation programmes or pressing ahead with aggressive plans.

Previous privatisations have generated new excitement for southern retail investors.

Often over-subscribed, they have brought new people to the market and have boosted overall market liquidity. Shares in the companies have climbed into and out of the sales.

In Portugal, the partial privatisation of EDP-Electricidadede Portugal the country's largest listed company, helped boost the ranks of shareholders and the overall market.

The government plans to sell another 15.5 per cent in the group this summer.``The first-stage sell-off ofEDP last summer alerted retail investors to the share market because it attracted a lot of people who had never invested in shares before,'' he said.

This summer, the Italian treasury will launch the privatisation of a fourth tranche of shares in the energy group ENI, which is expected to bring its shareholding base up to 2.0 million shareholders from 1.4 million.

Other key privatisations this year include the flagship airline Alitalia the operator of Rome's two airports, the Aeroporti di Roma, the motorway operator Autostrade and the banking group Banca Nazionale del Lavoro.

In Greece, shares already trading of groups that are slated for further privatisation have outpaced the market.

``Most state-owned firms due for privatisation have out-performed the market on expectations of improved performance after they are privatised. Examples include OTE telecom and Hellenic Duty Free Shops.

The governments plan to put the debt to use to pare down their hefty debt.For example, Italian finance ministerVincenzo Visco has said his country would push hard on its privatisation drive this year, with proceeds equalling around 0.7 to 1.0 per cent of gross domestic product or 15 to 10 trillion lira ($5.7 billion).

These funds are badly needed to slash debt to 100 per cent of GDP within six years - still well above single currency requirements of 60 per cent of GDP.

(Reuters)