Italian and Spanish borrowing rates fell sharply in key bond auctions today in a sign of improved market confidence as Italian Prime Minister Mario Monti urged Europe to do more to boost growth.
The cost of Italian 12-month bonds plunged from the last similar operation in December, while rates for Spanish bonds due in three, four and five years all fell below 4%.
Italy raised €12 billion and Spain nearly €10 billion - double the amount Madrid had been aiming for. The results suggested that investor concerns of an imminent debt blow-up in Italy or Spain have eased although longer-term worries linger.
In response, closely watched yields on both countries' 10-year bonds fell sharply on bond markets. Spanish 10-year yields dropped to 5.17%, Italian to 6.65%. Irish yields also fell, but were still marginally above the 8% level this evening.
Italy today issued €8.5 billion in 12-month bonds and €3.5 billion in flexible Treasury bills to mature within 136 days, the Bank of Italy said. Demand was strong with bids of around €19 billion, it added.
Borrowing rates on the 12-month bonds tumbled to 2.735% from to 5.952% in the last similar operation in December 12. Rates on the flexible Treasury bills were set at 1.644%, the Bank of Italy said, without providing a comparison with the last similar issue.
The Spanish auction was also good news for the government of Prime Minister Mariano Rajoy, who is struggling to slash spending and rein in a public deficit that shot far above target in 2011.
In an issue of three-, four- and five-year bonds, the Treasury boosted the sale from its original target of €4-5 billion as rates fell to less than 4%, Bank of Spain figures showed.
A breakdown of the sale showed Spain raised €4.272 billion in three-year bonds, €2.503 billion in four-year bonds and €3.211 billion in five-year bonds.
Spain's new leader said this week the overall public deficit could hit about 8% of GDP in 2011, well beyond the 6% target set by the previous Socialist government. Rajoy has vowed to stick to the 4.4% goal for 2012, however, and has announced the first steps of an austerity drive expected to trim the deficit by nearly €40 billion.
The government has outlined €8.9 billion in new budget cuts, €6.3 billion in extra taxes and an anti-tax fraud campaign it hopes will recoup about €8.2 billion. The latest auction means Spain has already raised nearly 12% of the €86 billion in gross medium- and long-term debt funds it needs for 2012.
Meanwhile, Monti told Italy's parliament following visits to Paris and Berlin that Europe had to do more to ensure growth.
"Europe is not only about budget discipline. It is very important to move beyond this and to invest constructive political energy in growth," he said. "We have to exploit the full potential of an integrated continent to grow more. And this has not been done up until now. It has not been done by the European institutions or by the biggest member states," he said.
Monti said he was planning meetings with British Prime Minister David Cameron and Polish Prime Minister Donald Tusk because their countries had a strong vision of market-oriented growth that Europe could follow.
Monti will also host French President Nicolas Sarkozy and German Chancellor Angela Merkel in Rome next week ahead of a summit of European leaders on January 29 where the debt crisis will once again take centre stage.
The former European competition commissioner has vowed to make Italy, the euro zone's third largest economy, an international player again. "Italy has to play an active role in helping to bring Europe back to a path of growth and stability," he said in his speech.
With a debt mountain of €1.9 trillion, an economy headed into recession and alarmingly high borrowing costs, Italy has been a focus for investor concern about the debt-hit euro zone in recent months.
Italy has a challenging year ahead on the debt markets as it needs to raise some €450 billion and in its last auction of long-term debt last month rates remained close to the danger threshold of 7%. Financial markets responded positively to the Italian and Spanish bond auctions this morning.
