- Associated Press - Thursday, January 12, 2012

MADRID — Spain and Italy gave financial markets a boost Thursday as they successfully raised nearly euro22 billion ($27.98 billion) in two keenly watched debt auctions that showed renewed investor confidence in the countries’ attempts to get a grip on their debt problems.

Spain sold nearly euro10 billion ($12.7 billion) in auctions of bonds maturing in 2015 and 2016, with demand strong and the amount sold double the maximum sought. Italy saw its borrowing costs drop sharply as it sold euro12 billion ($15 billion) in what was also its first test of market sentiment this year.

Both debt-laden countries have been the focus of worries that they might be dragged further into the crisis threatening the 17 countries that use the euro as their currency that has already forced Greece, Ireland and Italy to seek billions in bailout money.

Buyers also took euro8.5 billion in 12-month Italian bonds at a yield of 2.735 percent, sharply down from last month’s rate of 5.95 percent. They also bought euro3.5 billion ($4.45 billion) in bonds maturing in May at 1.644 percent interest, down from 3.251 percent last time.

Market reaction in both countries was good. In the secondary market, where issued bonds are then traded openly, the yield for Italy’s benchmark 10-year bond dropped to 6.6 percent from around 7 percent, a perilous level that forced other eurozone nations to seek bailouts.

The rate for the Spanish 10-year bond also dropped back to 5.15 percent after opening at 5.32 percent.

Meanwhile, the European Central Bank maintained its lending rate at 1 percent Thursday with President Mario Draghi saying there were “tentative signs of stabilization of activity at low levels” in the troubled eurozone.

Boosting liquidity has been the institution’s principal tool against the crisis as it aims to encourage banks to continue lending to companies so they can operate and grow.

Europe’s other leading central bank, the Bank of England, also kept its lending rate at a record low of 0.5 percent.

Nicholas Spiro of London-based consultancy Spiro Strategy said the Italian auction showed that ECB efforts to pump liquidity into the sector were working.

“Few would have predicted as recently as last month that Italy would be paying as little as 2.7 percent for 1-year paper,” he wrote. “This is on a par with Italy’s borrowing costs before it got sucked into the eurozone crisis in July.”

He noted that Spain’s auction also went well but said Italy’s funding challenges are of a “different order of magnitude.”

Chiara Cremonesi of UniCredit Research called the auction “extremely positive” and a good omen for a sale of longer-term debt on Friday.

Noting that while demand for shorter maturities has been strong in recent weeks, she said the auction Thursday “was even better than our expectations.”

Italy’s euro1.9 trillion ($2.42 trillion) in government debt and heavy borrowing needs this year have made it a focal point of the European debt crisis.

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