Bond auctions, package plan ease euro jitters
Spain followed Portugal with a successful debt sale on Thursday and investors showed growing confidence that governments would agree bold new measures to stem the euro zone's debt crisis.
A day after Portugal surprised many in financial markets by selling 10-year bonds relatively easily, Spain sold 5-year debt in the first tests of the year for the countries seen most at risk of joining Greece and Ireland in accepting international bailouts.
A separate sale of Italian bonds also attracted strong demand.
The euro pushed up to its highest level in a week and the risk premium investors demand to hold the debt of Spain, Portugal and Italy instead of Germany fell, in a sign markets are growing more bullish about the bloc's ability to address its economic and financial woes.
The market is seeking a turning point in the peripheral crisis, said Peter Chatwell of Credit Agricole CIB in London.
Late on Thursday, German Finance Minister Wolfgang Schaeuble announced that major European states were working on a comprehensive medium-term package to solve a debt crisis which some experts believe threatens the future of the 12-year old currency bloc.
Top European Union officials are pushing for the bloc to increase the size and scope of the 440 billion euro ($574 billion) rescue fund it agreed to put in place after bailing out Greece in May.
Since then, the EU has been forced to rescue Ireland and concerns have grown that other high-deficit countries like Portugal and Spain could require aid as well.
STEPS TO SOOTHE MARKETS
Both Germany and France have played down the need to boost the fund, known as the European Financial Stability Facility (EFSF), but they are discussing closer fiscal coordination and other steps meant to soothe market fears about the stability of the 17-nation bloc, which added new member Estonia on January 1.
One idea that has been floated is to reduce the interest rate demanded of countries that tap the facility.
Another is to allow the EFSF to buy government bonds or provide short-term credits to vulnerable euro members -- ideas that seem to be dividing government ministers in Europe's economic powerhouse Germany.
The European Central Bank is expected to press governments to do more to tackle the debt crisis after a policy meeting on Thursday at which it is widely expected to keep its benchmark interest rate steady at a record low 1 percent.
The ECB faced pressure last year from euro zone governments to ramp up its purchases of peripheral debt, but it has opted for a more cautious approach and remains staunchly opposed to the large-scale bond buys pursued by its central bank counterparts in the United States and England.
Spain sold 3 billion euros of 5-year bonds on Thursday, paying a full percentage point more than it did at a previous auction in November but -- at 4.542 percent -- well below the level some had feared. Demand was robust with over 6 billion euros in bids and 60 percent of the debt was bought by investors outside of Spain, a source told Reuters.
Spanish bank shares rallied for a second straight day, with Banco Santander trading up 3.2 percent and BBVA rising 5.3 percent.
Italy also saw yields rise in auctioning 6 billion euros of 5- and 15-year bonds, but demand was stronger than its last sale in November.
GERMAN STANCE CRUCIAL
Investors were cheered on Wednesday when German Chancellor Angela Merkel vowed, at a news conference in Berlin with visiting Italian Prime Minister Silvio Berlusconi, to do what is necessary to safeguard euro zone stability.
But she may be reluctant to commit to bold new steps before state elections in Hamburg and Baden-Wuerttemberg in coming months, given German voters' scepticism about helping out euro zone debtors.
Merkel might also have to go to parliament to secure its approval for any substantial increase in the EFSF, whose legality is being challenged in court by eurosceptic academics in Germany.
Hans-Werner Sinn, the influential head of the Ifo research institute in Munich, warned against boosting the fund in an interview with the Handelsblatt daily on Thursday, likening such a move to the Irish government's disastrous blanket guarantee of bank debts -- a key factor in forcing Dublin's bailout.
(Additional reporting by Christiaan Hetzner; Writing by Noah Barkin; Editing by Ruth Pitchford)
© Copyright Thomson Reuters 2024. All rights reserved.