Spain, Italy Sell Bonds to Strong Demand

Successful auction indicates a somewhat bullish market turn as ECB meets to consider strategy

Apparent confidence in the ability of the euro zone to combat its ongoing debt crisis marked the first auction for the year of Spanish and Italian bonds on Thursday. In the wake of the surprisingly strong showing on Wednesday of Portugal’s 10-year bonds, both nations saw strong demand for their paper, with yield falling and the euro rising in response to its highest level in a week.

According to a Reuters report, Spain sold 3 billion euros’ worth ($3.96 billion) of its 5-year bonds to more than 6 billion euros’ worth of bids, and while the interest rate it will pay on the bonds is a full percentage point higher than November’s sale, at 4.542%, it is far lower than had been feared. Investors outside the country accounted for 60% of sales.

Italy’s yields rose from November as well, but it was able to sell 6 billion euros in 5- and 15-year bonds.

Wolfgang Schaeuble, Germany’s finance minister, announced late Thursday that major European states were putting together a “comprehensive” medium-term strategy to resolve the debt crisis. Some officials are advocating an increase in the European Financial Stability Facility (EFSF), raising its current limit of 440 billion euros and broadening its scope.

Germany and France are both opposed to such a measure; Hans-Werner Sinn, who heads the Ifo research institute in Munich, in an interview with the daily Handelsblatt compared the action to the blanket guarantee Ireland’s government issued on that nation’s bank debts.

Chancellor Angela Merkel, also opposed, might find herself in the position of having to go to the German parliament to have the move approved if it is adopted; there is doubt whether its legality would pass muster in Berlin. She has gone on record saying that she will do whatever is necessary to safeguard the euro, but may be reluctant to commit to any drastic action before the next round of elections at home.

Other ideas being considered are a reduction in the interest rate countries must pay who borrow from the rescue fund, or allowing the EFSF to buy government bonds or provide short-term credits to vulnerable euro members.

The European Central Bank (ECB) is expected to push euro zone governments to take more direct action in the crisis; it holds a policy meeting on Thursday at which it is expected to keep its benchmark interest rate unchanged at 1%, a record low.

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