ECB rescue plan underpins Italian bond auction

Thu Aug 30, 2012 11:00am EDT
 
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By Francesca Landini and Andreas Rinke

MILAN/BEIJING (Reuters) - A successful Italian bond auction on Thursday pointed to confidence among investors that the European Central Bank will keep its word and take measures dramatic enough to get a grip on the euro zone's debt crisis.

In Beijing, German Chancellor Angela Merkel appeared to temper China's fears about the damage the crisis could wreak on the world economy, while French President Francois Hollande, on a visit to Madrid, said he could see a case for ECB intervention.

Since ECB President Mario Draghi vowed a month ago to do whatever it takes to save the euro, Spanish and Italian bond yields have fallen markedly, particularly for shorter-dated maturities. Now he has to follow through.

At a policy meeting next week, Draghi is expected to reveal the ECB's terms of engagement for intervening in the bond market, reconciling an unwilling German Bundesbank to the plan while avoiding conditions that will scupper its effectiveness.

Credible ECB action to lower Italian and Spanish borrowing costs would buy the two countries time to reduce their debt and push through economic reforms to boost growth potential.

Italy sold 7.29 billion euros ($9.12 billion) of debt at its first auction in a month, and shifted the maximum targeted amount of a new 10-year bond at a yield well under its 6 percent pain threshold.

"It's a lower yield than the previous one," said Elisabeth Afseth, fixed-income analyst at Investec in London. "I think it is very much to do with the ECB, and if we hadn't had that, I suspect that both Spanish and Italian yields would have been considerably wider than where they are."

Chinese Premier Wen Jiabao said a briefing by Merkel had assuaged his concerns slightly, but no quick resolution of the crisis was in sight.   Continued...

 
A structure showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt July 11, 2012. REUTERS/Alex Domanski