Italy, Spain ace bond tests as ECB holds rates steady

Italian and Spanish borrowing costs plunged in their first bond auctions of the year Thursday in a sign of improved market confidence as the ECB held eurozone interest rates at a record low 1.0 percent.

Italy raised 12 billion euros at 12-month rates that were less than half their level at an auction last month and Spain rustled up nearly 10 billion euros — double the amount that it had been aiming for.

Analysts said the auctions reflected an easing of market jitters as well as the influence of cheap funds made available to crisis-hit banks by the European Central Bank last month, which have encouraged some lenders to buy up bonds.

The sales “went very well,” analysts at Italy’s UniCredit bank said.

Italy’s auction “reflects a big improvement in market sentiment as well as the effects of the huge liquidity in the system,” they said in a note.

Ranvir Singh, chief executive of London-based market analysts RANsquawk, said the Spanish sale was “highly impressive” but had been “exaggerated” in part by the ECB’s launch of new three-year loans at super-cheap rates.

European Commission President Jose Manuel Barroso meanwhile called for an increase in emergency funds for eurozone states and Italian Prime Minister Mario Monti urged Europe to aim for growth to exit its prolonged debt crisis.

“The European Commission is pleading for the most credible firewalls possible. It’s important for the confidence of investors in the ability of the euro to overcome this crisis,” Barroso said on a visit to Copenhagen.

The single currency bloc currently has a temporary support mechanism, the European Financial Stability Facility (EFSF), which has around 250 billion euros ($319 billion) out of an initial lending capacity of 440 billion euros.

This is not considered enough to assist a large state like Italy and Spain if they got into trouble.

A debate is therefore underway on whether to preventively beef up the temporary fund or instead boost the EFSF’s successor, the permanent European Stability Mechanism (ESM), which will come into operation in July.

German Chancellor Angela Merkel is opposed to pumping in additional funds.

Monti told Merkel on a visit to Berlin on Wednesday that Italy needed concrete assistance to help bring down borrowing costs that have flown higher in recent months, warning there could otherwise be an anti-European backlash.

On Thursday, the former European commissioner said that Europe had to do more to encourage economic growth by drawing inspiration also from Britain and Poland and hinted that the ECB should play a bigger role in the future.

“Europe is not only about budget discipline. It is very important to move beyond this and to invest constructive political energy in growth,” Monti said.

“We have to exploit the full potential of an integrated continent to grow more. And this has not been done up until now,” he added.

Monti will host French President Nicolas Sarkozy and Merkel for trilateral talks in Rome next week ahead of a summit of European leaders on January 29 where the debt crisis will once again take centre stage.

He also said that once new European budget discipline rules are in place “it is possible that the European Central Bank… can feel more relaxed.”

The respected economics professor has vowed to make Italy, the eurozone’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 euros ($2.4 trillion), an economy headed into recession and alarmingly high borrowing costs, Italy has been a focus for investor concern about the debt-hit eurozone in recent months.

The country also has a challenging year ahead on the debt markets as it needs to raise some 450 billion euros and in its last auction of long-term debt last month rates remained close to the danger threshold of 7.0 percent.

An auction of long-term bonds by Italy on Friday is being closely watched.

Financial markets responded positively to Thursday’s bond auctions, with the Milan stock exchange shooting up more than 3.0 percent while Madrid added 1.53 percent. Borrowing rates on the wider bond markets also eased sharply.

There was also more good news for Italy with industrial production inching up in November even though the economy as a whole is still forecast by the government to contract by 0.4 percent this year.