Eurozone borrowing rates ease, market cautious

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Tensions on eurozone bond markets eased on Friday, with Italian and French borrowing rates down sharply as investors waited to see if the latest moves to tame the bloc's debt crisis will work.

The spread between German and French 10-year government bond rates narrowed after hitting a historic high of 170 basis points on Thursday on concerns that France may join Italy and Greece in struggling to fund its debt.

In midday trade, the spread was 159 basis points (1.59 percentage points, as the rate of return on the French bond fell to 3.376 percent from 3.456 percent while the German bund yield rose to 1.797 percent from 1.776 percent.

German bonds are sought after by nervous investors and continue to offer a safe haven but Friday was expected to see new governments formed in Athens and Rome, with urgently needed austerity measures also to be passed.

The Italian 10-year bond rate, which spiked above the 7.0 percent danger level earlier in the week, fell to 6.602 percent from 6.873 percent, still too high for comfort but an improvement nonetheless.

Analysts cautioned that the eurozone situation remains extremely difficult as speculation abounds that France could be next in the firing line given the strains in its public finances.

On Thursday, ratings agency Standard and Poor's said it had mistakenly announced to some of its clients that it had downgraded France's top "AAA" credit rating, stoking fears of just such a move which would very likely spark even more turmoil on the financial markets.

Analysts at CM-CIC in Paris said the S&P announcement had unsettled investors and warned that "there is no smoke without fire."

For Credit Agricole, Friday's easing of tensions "is very fragile," with the markets troubled by a "high level of uncertainty."

© 2011 AFP

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