Spain and Italy staged successful bond sales on Thursday, easing concerns about an escalation of eurozone debt strife and buying the bloc's leaders more time to come up with a new package of anti-crisis measures. European Central Bank President Jean-Claude Trichet renewed a call for eurozone governments to boost the size and scope of their 440 billion euro ($578.2 billion) rescue fund and warned of short-term inflation pressures in the euro area.
-- Spain and Italy attract strong demand in bond auctions
-- Trichet urges increase in EFSF, cautions on inflation
The euro pushed up to its highest level against the dollar in a week and the risk premium investors demand to hold debt from the eurozone's fragile southern periphery fell, in a sign investors are more confident about the bloc's determination to address its economic woes.
After a rocky start to the year, optimism was rekindled on Wednesday when Portugal attracted strong demand for its 10-year bonds and German Finance Minister Wolfgang Schaeuble promised a "comprehensive" new package of debt crisis measures by the time EU leaders meet for a summit in March. Today, Spain and Italy passed their first major financial tests of 2011, auctioning a total of 9 billion euros in bonds.
Following rescues of Greece and Ireland last year, Portugal and Spain are seen as the eurozone countries most at risk of a bailout and weak demand for their bonds would have aggravated jitters and raised pressure on European leaders to act fast. "The figures look really good, it's the perfect sequel to the Portugal auction yesterday," Michael Leister, a strategist at WestLB in Duesseldorf, said of the Spanish auction.
Top EU officials, including European Commission President Jose Manuel Barroso, are pushing for the bloc to increase the size of the rescue fund it rushed into place following its bailout of Greece in May. The eurozone's big countries are discussing closer fiscal co-ordination and other steps meant to soothe market fears about economic and financial imbalances in the euro area.
One idea that is being floated is to reduce the interest rate demanded of countries that tap the facility. Another is to allow the EFSF, or the facility that will replace it in 2013, to buy government bonds or provide short-term credits to vulnerable euro members - ideas that are controversial in Berlin.
This week's auctions appear to have bought leaders some time to finalise their plan, but pressure from nervous markets could resurface quickly if they sense governments are wavering on introducing bold new steps. Spain sold 3 billion euros of 5-year bonds on Thursday at a yield of 4.54 percent - nearly a full percentage point more than at a previous auction in November but well below the level some had feared.
Demand was robust with over 6 billion euros in bids and 60 percent of the debt was bought by investors outside of Spain, a source told Reuters. Shares in large Spanish banks, whose own debt levels and exposure to a collapsed property market have worried markets, shot higher for a second day, with Banco Santander trading up 4.0 percent and BBVA rising 5.3 percent.
But in a reminder that Spain's financial sector remains vulnerable, retail bank Banesto announced its profit had tumbled nearly 20 percent last year due to bad loans and a price war for deposits. Like Spain, Italy saw yields rise as it sold 6 billion euros in 5- and 15-year bonds, but demand was stronger than its last sale in November. Italy has largely avoided the wrath of the bond markets, but could become a target due to its high debt levels.