Italy, Spain and even Greece managed to raise fresh funds at lower borrowing rates today in spite of Moody's sovereign debt downgrades and Athens' battle to avert bankruptcy.
Italy and Spain, the euro zone's third and fourth-biggest economies, lured strong investor interest in defiance of the New York-based credit rating agency, which axed their ratings.
Even Greece, forced to accept tough austerity measures in return for an international bailout that staves off financial collapse, was able to trim costs when raising short-term debt on the market.
Investors seem to have had their pockets filled with cash since the European Central Bank in December extended nearly half a trillion euros in cheap three-year loans to euro zone banks.
They clamoured to lend money to all three countries and shrugged off Moody's downgrades and warnings, which irked several governments in the region.
Italy raised €6 billion in an auction of two, three and five-year bonds; Spain sold 12 and 18-month bonds for €5.446 billion; and Greece picked up €1.3 billion in three-month bills. All three managed to bring down their borrowing costs.
Spain enjoyed the strongest demand, which outstripped supply by nearly three to one; Italy benefitted from the sharpest drop in rates; and Greece showed it could still raise short-term financing even at a costly, albeit lower, borrowing rate of 4.61% rate.
Italy raised €6 billion in an auction of medium-term bonds in which rates fell sharply, the Bank of Italy said. The Treasury had been expecting to raise between €3.75 billion and €6 billion. Total demand was strong at €9.5 billion.
Italy sold its three-year benchmark bond at an average 3.41% yield, well below an auction rate of 4.8% a month ago. This is the cheapest rate Italy paid to sell three-year debt since March last year.
Spain's borrowing costs also tumbled as it raised almost €5.5 billion in an auction of 12- and 18-month bonds, the Bank of Spain said. Rates fell from a comparable auction four weeks earlier to 1.899% from 2.049% for the 12-month bonds, and to 2.308% from 2.399% for the 18-month bonds.
Moody's last night chopped the debt ratings of Italy, Spain and Portugal and put France, Britain and Austria on warning, saying they were increasingly vulnerable to the euro zone crisis.
Casting doubt over whether Europe's leaders were doing enough to reverse the downslide of the region's economy and financial sector, Moody's also cut its ratings for Slovenia, Slovakia and Malta.
The ratings agency cited the region's weak economic prospects as threatening "the implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness."
Several countries have smarted at the decision. Austria's government said it regretted Moody's downgrade of its credit outlook, charging that the agency had failed to take into account a massive austerity plan to mop up the red ink in the government's accounts.
Eurogroup finance ministers are to meet tomorrow to discuss the rescue for Greece, determined to leave Athens no wriggle room out of implementing required spending cuts. Luxembourg Finance Minister Luc Frieden warned late last night that if Greece cannot deliver on its promises, then the euro zone will move on without it.
Spain says Moody's downgrade 'contradictory'
Spain today lashed out at Moody's decision to downgrade its sovereign debt, saying it was 'contradictory' given that the rating agencies have welcomed its latest economic reforms.
"They say that yes, they welcome the reforms and then they decide the opposite according to their criteria, it is fairly paradoxical," Budget Minister Cristobal Montoro said.
"It is good, they do their work, their valuations, but the truth is that it is a bit contradictory," he said on Spanish radio.
Moody's slashed Spain's rating by two notches to A3 from A1 late last night, saying the country's regional governments were not making up budget shortfalls fast enough.
"Moody's is skeptical that the new government will be able to achieve the targeted reduction in the general government budget deficit, leading to a further increase in the rapidly rising public debt ratio," it said.
At the same time, the agency trimmed Italy and Portugal ratings by one notch and warned France, Britain and Austria that they were increasingly vulnerable to the crisis of confidence in euro zone debt.
Spain's conservative government, which took power in December, has launched reforms to wipe out the budget deficit by 2020, bolster banks' balance sheets and overhaul the labour market to fight a 22.85% jobless rate.
Osborne defends UK cuts after warning
UK Chancellor George Osborne defended the government's austerity package today after Britain was threatened with the loss of its AAA credit rating amid fears over weaker growth prospects and potential shocks from the euro zone crisis.
Ratings agency Moody's put the UK on "negative outlook" last night, increasing the chance of the country being stripped of its cherished status.
Shadow chancellor Ed Balls said the move was "a significant warning" and urged the government to spark economic growth, but Mr Osborne said it was "a reality check for anyone who thinks Britain can duck confronting its debts".
"We can't waver in the path of dealing with our debts and here is yet another organisation warning Britain that if we spend or borrow too much we are going to lose our credit rating but, more importantly, what that leads to potentially is a loss of investor confidence in our economy,'' the Chancellor said.
"If people don't invest in our economy, you don't get growth and you don't get jobs. "It's yet another reminder Britain doesn't have some easy route out of the economic problems that have accumulated over the past decade, it's got to confront those problems head-on and that's precisely what I intend to do," he added.
Moody's said it foresaw three main risks to the UK's top rating, the first being a combination of slow growth with "reduced political commitment to fiscal consolidation" or a "failure to respond" to worsening conditions.
Other dangers were "a sharp rise in debt-refinancing costs, possibly associated with an inflation shock or a deterioration in market confidence over a sustained period" or a fresh crisis in the banking sector.
The AAA rating "continues to be well supported by a large, diversified and highly competitive economy, a particularly flexible labour market, and a banking sector that compares favourably to peers in the euro area", it noted.
Significant structural reforms meant the economy was expected to return to 2.5% trend growth rate even if more slowly than previously anticipated, Moody's said.