Market eases pressure on Spanish, Italian debt

2nd July 2012, Comments 0 comments

Pressure on Italy and Spain declined on Monday owing to a eurozone plan unveiled last week that should reduce Madrid's debt and give Rome direct access to a rescue fund for its bonds, if necessary.

In mid-day trading, the bond market interest rate, or yield, on 10-year Spanish debt declined to 6.199 percent from 6.291 percent late on Friday.

The risk premium to hold Spanish bonds compared with benchmark German Bunds declined to 463 basis points, or 4.63 percentage points.

Before the EU summit in Brussels last week, the premium varied about 500 basis points (5.0 percentage points).

The market rate for 10-year Italian bonds dropped to 5.680 percent from 5.807 percent.

"The effects of the summit are being felt. Investors are reassured by the fact that the rescue fund could serve as a backstop to protect Spain and Italy," explained Jean-Francois Robin, a bond trader at the French investment bank Natixis.

Eurozone leaders agreed in Brussels to allow the future European Stability Mechanism to buy bonds issued by struggling eurozone countries directly, which means markets should find it harder to drive yields ever higher.

The EMS is also to provide direct aid to Spanish banks, which would reduce the level of debt carried on Madrid's national accounts.

But at more than 6.0 percent, Spanish 10-year bonds are still at a level considered unsustainable over the longer term.

IHS Global Insight economist Raj Badiani noted that while the latest measures would ease pressure on Spain and Italy, "both Madrid and Rome will need to continue on their paths to restore fiscal discipline and make sustained progress on structural reforms that improve their underlying competitiveness and productivity."

© 2012 AFP

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