Italian, Spanish bonds ease sharply after ECB move

PARIS: 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 0630 GMT, the yield or the rate of return earned by investors on the Italian 10-year government bond was 5.602 percent, down sharply from 6.189 percent at the close Friday.

The Spanish 10-year bond was at 5.507 percent after 6.271 percent.

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.

"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.

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.

Although the ECB did not say explicitly that it would buy Italian and Spanish bonds to ease pressure on the third- and fourth-biggest eurozone economies, financial market analysts have been urging that the central bank take that step.

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.

Copyright AFP (Agence France-Presse), 2010

Copyright AFP (Agence France-Presse), 2010