Borrowing rates ease for weak eurozone countries

PARIS: The cost of borrowing for eurozone countries under strain eased sharply Tuesday, two days before a eurozone summit on a second rescue for Greece and to curb the debt crisis.

The cost of borrowing for 10 years for Italy fell to 5.779 percent from 5.955 percent late on Monday when it had edged above 6.0 percent.

The yield, or rate, on 10-year Spanish debt fell to 6.173 percent from 6.293 percent.

The equivalent yield for Greece was little changed at 17.658 percent from 17.602 percent.

But the yield on German and French government bonds rose. The yield on the 10-year German Bund rose to 2.684 percent from 2.646 percent and on French debt to 3.389 percent from 3.367 percent.

When risk is perceived to rise, demand for government bonds falls, so the price of existing instruments being traded on the market falls. This in turn automatically increases the fixed income attached to the instrument as a percentage of the new lower price.

If bonds rise, yields fall.

In either case, the market is signalling the interest rate which the government must offer if and when it next raises funds. Yields of 6.0 percent or more are considered to be unsustainable for economies such as those in the European Union.

The rise of the yields on the bond market, reflecting many concerns about first the state of the economy in Greece, then in Ireland and Portugal, made it impossible for these countries to borrow from private investors and savers, and drove them into the arms of rescues by the European Union and International Monetary Fund.

Now Greece needs a second rescue, but deep divisions over how to construct this, and the extent to which private investors should bear part of the cost to relieve taxpayers, have caused delays to an agreement and alarm on financial markets.

In the last few weeks this has driven up sharply the cost of borrowing for Italy and Spain, putting them too at risk of being dragged down by the debt crisis.

At BNP Paribas bank, strategists, referring to the summit, said that "the meeting on Thursday in Brussels is decisive" and that "the risk of contagion continues to weigh" on the market.

They said that "yet again, strong messages directed at the markets are needed to calm things down."

Copyright AFP (Agence France-Presse), 2011