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Italy, Spain ace bond tests as Monti urges growth

Italian and Spanish borrowing rates fell sharply in key bond auctions on Thursday in a sign of improved market confidence as Italian Prime Minister Mario Monti urged Europe to do more to boost growth.

The cost of Italian 12-month bonds plunged to 2.735 percent compared to 5.952 percent in the last similar operation in December, while rates for Spanish bonds due in three, four and five years all fell below 4.0 percent.

Italy raised 12 billion euros ($15 billion) and Spain nearly 10 billion euros — double the amount Madrid had been aiming for.

The results suggested that investor concerns of an imminent debt blow-up in Italy or Spain have eased although longer-term worries linger.

Meanwhile Monti told Italy’s parliament following visits to Paris and Berlin that Europe had to do more to ensure growth.

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

“We have to exploit the full potential of an integrated continent to grow more. And this has not been done up until now. It has not been done by the European institutions or by the biggest member states,” he said.

Monti said he was planning meetings with British Prime Minister David Cameron and Polish Prime Minister Donald Tusk because their countries had a strong vision of market-oriented growth that Europe could follow.

Monti will also host French President Nicolas Sarkozy and German Chancellor Angela Merkel 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” — an apparent reference to greater ECB assistance.

The former European competition commissioner 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.

Italy 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.

Financial markets responded positively to the Italian and Spanish bond auctions Thursday, with the Milan stock exchange shooting up 2.8 percent while Madrid added 1.41 percent.

Investors were also awaiting an interest rate decision later on Thursday by the ECB, which has cut interest rates the past two months but was widely expected to hold its fire to wait and see what impact those moves were having.

Eurozone interest rates are currently at a historical low of 1.0 percent.

At its meeting last month, the ECB also offered banks in the eurozone an unlimited amount of liquidity by loosening collateral rules, cutting the minimum reserve ratio and launching new three-year loans at super-cheap rates.