Italian, Spanish bonds ease sharply after ECB move

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The pressure on Italian and Spanish government debt eased sharply Monday after the European Central Bank said it was ready to buy eurozone bonds following the turmoil on the markets last week.

The ECB said it would "actively" renew eurozone bond purchases after Italy and Spain announced fresh measures and reforms to bolster their economies and tackle debt problems which had pushed their borrowing costs to record highs.

At around 0715 GMT, the yield or the rate of return earned by investors on the Italian 10-year government bond was 5.417 percent, down sharply from 6.189 percent at the close Friday.

The Spanish 10-year bond was at 5.285 percent after 6.271 percent, with both doing even better than in opening trade.

Rates above six percent are thought to be unsustainable over the longer term for government financing and the pressure on Italy and Spain had raised fears that they too may need a bailout after Greece, Ireland and Portugal.

French Finance Minister Francois Baroin said Monday that the ECB is ready to buy Spanish and Italian government debt.

New measures announced at the weekend by Spain and Italy "have enabled the ECB to consider that, given that they are moving in the right direction, it was legitimate to help them," Baroin told Europe 1 radio.

"The ECB announcement seems to be having a real impact on the yields of the two countries," said Nordine Naam, a bond strategist at French investment bank Natixis.

As the pressure eased on their bonds, so did the risk premium that Italy and Spain must pay compared with Germany, Europe's strongest economy and the benchmark for eurozone government debt.

The spread or the difference in yield between the Spanish 10-year bond and the German equivalent was at 300 basis points (3.0 percentage points), down from record highs of more than 400 basis points last week.

The spread on the Italian bond was 311 basis points.

In its overnight statement, the ECB governing council welcomed additional steps by Rome and Madrid and said it considered the "decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits."

It also stressed the "decisive importance" of each government's declared intention "to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole."

That meant governments had pledged to honour their debts and not consider default as a way of resolving debt problems.

Given those conditions, along with decisions taken at an emergency July 21 eurozone summit, "the ECB will actively implement its Securities Markets Programme," which purchases bonds issued by eurozone governments on secondary markets.

Italian Prime Minister Silvio Berlusconi has vowed that lawmakers would push through additional austerity measures, including a constitutional amendment to force governments to keep balanced budgets.

Spain announced new reforms to bring in an additional 4.9 billion euros ($7.0 billion) and help curb its public deficit.

The moves were aimed at demonstrating to financial markets that the two crucial eurozone economies were serious about getting on top of their respective problems.

© 2011 AFP

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