Spain and Italy see borrowing costs collapse

Tim Wallace
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INVESTORS showed increasing trust in the Spanish and Italian governments yesterday, allowing the countries’ borrowing costs to fall to unexpectedly low levels.

It came as credit ratings agency Standard and Poor’s published a report arguing the Eurozone “could start to emerge from sovereign debt troubles in 2013,” if the continent manages to address major imbalances and its lack of competitiveness.

Madrid raised €5.8bn (£4.8bn) in two year bonds, paying just 2.47 per cent.

That compares with an interest rate of 3.28 per cent in the last similar auction three months ago and helped pull the benchmark 10-year bond yield down below five per cent for the first time in nine months.

The Italian government raised €8.5bn in one-year debt, which came in at a yield of 0.864 per cent, down from 1.46 per cent in December and the lowest level in three years.

Both governments have been struggling to keep a lid on borrowing costs.

Spain’s 10-year bond yields peaked at more than 7.5 per cent in July 2012 while the Italian government’s rose above 7.4 per cent in November 2011.

Borrowing costs of above seven per cent are widely regarded as unsustainable. Greece, Ireland and Portugal all required bailouts after their bonds breached that level.

But tough austerity programmes and economic reforms, combined with supportive action from the European Central Bank, have pulled them back from the brink.