Italian, Spanish markets get ECB shot in the arm

8th August 2011, Comments 0 comments

Italian and Spanish borrowing costs eased sharply and stocks shot up Monday after the European Central Bank (ECB) said it was ready to buy eurozone bonds and governments promised to slash deficits.

Bond yields for the eurozone's third and fourth largest economies fell sharply after hitting record highs last week on fears Italy and Spain could plunge into a debt spiral, indicating greater investor confidence.

"The ECB is doing the right thing because it promised to buy Italian and Spanish bonds," said Umberto Bossi, a minister in Prime Minister Silvio Berlusconi's government and leader of the influential Northern League party.

Bossi had said earlier: "Everyone is afraid our bonds will turn into scrap paper but by returning to budget balance one year early, the ECB has guaranteed that from Monday it will buy our bonds.

"For us it's a solution, a guarantee," Bossi told reporters.

Italian business daily Il Sole 24 Ore said the market was "euphoric" after the benchmark FTSE Mib index in Milan opened slightly lower, down 0.09 percent but then shot up to almost 5.0 percent in the first few minutes of trading.

The IBEX-35 stock index in Madrid also jumped 3.31 percent in early trades, with banking shares leading the rally.

"Stocks have plunged in the last few weeks following the movements of the spread" between Italian and Spanish bond yields on one side and benchmark German bonds on the other, said Marco Valli, an analyst from Italy's UniCredit bank.

"With the announcement of the ECB on supporting Italian and Spanish bonds, this tendency has reversed and bank shares are the first to benefit," he said.

Daily Corriere della Sera meanwhile revealed the contents of a letter to Berlusconi from ECB chief Jean-Claude Trichet and Italian central bank governor Mario Draghi spelling out the measures the government should take.

The priorities identified in the letter were the privatisation of municipal services and an overhaul of labour laws to allow easier hiring and firing.

It also called for liberalisation reforms to be passed by government decree to speed up their approval, the report said.

"If Italy ignores the contents of the letter it can forget about ECB intervention to support its bonds," the newspaper commented.

Analysts said that having ignored the crisis for too long, the Italian government was now effectively "under external administration."

Guido Compagna, a commentator for financial website, said France and Germany were now in charge of Italy's economic policy.

"Silvio Berlusconi accepts this de facto external administration albeit reluctantly since he sees it as the only chance for his government to last if possible until the end of its mandate" in 2013, he said.

Il Sole 24 Ore columnist Lina Palmerini said: "The markets have punished an Italy not deemed trustworthy for the future ... and on the other hand Silvio Berlusconi has responded by playing things down.

"The government and its zig-zagging come out worst from all this: first calm, now speed; first holidays, now work," she wrote.

Italy's parliament has been called back from summer recess this week to adapt the constitution to enforce balanced budgets and to enact labour market reforms.

At a hastily convened press conference on Friday, Berlusconi announced that the government was bringing forward its timetable for reducing the deficit to 0.2 percent of output to 2013 instead of 2014 as expected earlier.

The announcement means an acceleration of the 48-billion-euro ($69-billion) austerity cuts approved by parliament last month despite opposition from the centre-left opposition which said Italy's poorest would be hit hardest.

Italy's budget deficit was at 4.6 percent of Gross Domestic Product (GDP) last year but its total public debt level is one of the highest in the world and the economy's anaemic growth rate has spooked investors.

Spanish Finance Minister Elena Salgado has also promised extra effort -- savings of 2.5 billion euros this year through tax changes for large corporations and a further 2.4 billion euros through the purchase of cheaper generic drugs.

The savings would help the government to cut the public deficit from 9.2 percent of GDP last year to 6.0 percent in 2011 and 4.0 percent in 2012 and then to 3.0 percent -- the EU ceiling.

© 2011 AFP

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