Pressure on Italy and Spain eased further on bond markets today after Italy paid less than 2% to sell €11 billion of six-month bills.
Solid demand for the Italian short-term debt pushed its borrowing costs to levels last seen before the country was dragged to the fore of the euro zone debt crisis in early July.
The sale lifted the mood ahead of what could be a tougher sale of longer-term debt on Monday. Market sentiment toward Italy, whose size means it could threaten the entire euro zone if its debts run out of control, has turned more positive in recent days.
The near half-trillion euro injected into the region's banks by the European Central Bank and signs that Italy's new government is getting on top of its spending have helped to pull the country back from the edge.
At today's sale, Italy's six-month debt yields fell to 1.97%, well below an auction level of 3.25% a month ago and a far cry from a euro lifetime record of 6.5% Italy paid in November to sell six-month paper at the worst of the crisis.
Italian 10-year yields fell below 6% on the market after the bill sale, and were down to 5.9% this evening. They had pierced this psychologically important level for the first time in six weeks on Thursday.
Earlier, this week Spain paid 1.85% to sell €1.1 billion of six-month debt, helping its 10-year yields to fall just below the 5% mark for the first time since October.
Spanish bond yields flirted with the 7% level in November.
Irish 10-year yields also fell to stand at 7.33% this evening.
The ECB will offer another batch of three-year funds in February, which some analysts think will provide further support for bonds issued by the region's most indebted states.
"Outstanding" progress on crisis - ECB chief
European Central Bank president Mario Draghi said today that the euro zone had made "outstanding" progress in its efforts to resolve the sovereign debt crisis.
"If you compare today with even five months ago, the euro zone area is another world," he told a forum at Davos in Switzerland.
Draghi said that the fiscal compact most European states are negotiating was crucial to efforts to resolve the crisis, praising governments' willingness to give up sovereignty.
The ECB chief said a lack of regulation was one of the main causes of the crisis which erupted four years ago but he said governments were now moving to address this although they needed to move quicker to put their plans into practice.
"The key root cause of the financial crisis were very serious regulatory flaws in the major financial jurisdictions," said Draghi.
Draghi said that some of the other fundamental problems had also been addressed in the banking sector. "Banks today have more capital, less debt, somewhat more immune from the perverse incentives that characterised the crisis," said the Italian.
Signs that worst of the crisis is over - Geithner
US Treasury Secretary Timothy Geithner also praised Europe's efforts to turn the corner, saying recent moves had bolstered the single currency's credibility.
Speaking the day after the US Federal Reserve cited the euro zone crisis as a reason for cutting its growth forecast, Timothy Geithner said there were signs that the worst of the crisis was over.
"Europe is making some progress," he told delegates, saying that over the past two months they had laid the foundations for a "more credible framework".
"We have three new governments (Italy, Greece, Spain) doing some very tough things, an ECB doing the things you have got to do," he said.
The annual forum has been marked by gloom about the state of the global economy, and in particular about Europe's struggle to cope with yawning public deficits while at the same time seeking growth and jobs.
The euro has been under pressure - amid fears that Greece or even eventually a giant like Spain or Italy could default on its debts - and the 17-nation currency bloc is on the brink of renewed recession.
Davos has reverberated with calls for euro zone nations to act decisively to restore confidence, with Mexican President Felipe Calderon calling on Europe to "bring out the bazooka immediately" to prevent the problem from sinking Italy and Spain.
Geithner said Europe needs a "stronger and more credible firewall" and hinted that the US and emerging economies could supply the International Monetary Fund with more funding to help the euro zone rescue effort.
"If Europe is able to do that, we believe that the IMF can play a substantive role. It can't be a substitute for a European response," he said.
