Caution despite bond sale success

SPAIN and Italy exceeded expectations in raising short-term money in abundance and at much reduced rates on the markets.

However analysts warn this should not be read as a sign the eurozone crisis is easing, but rather that ECB intervention is showing some signs of success.

Reflecting continuing fears, European Commission president Jose Manuel Barroso said that more has to be done in terms of creating firewalls to prevent contagion spreading even wider through the eurozone.

“The question is, how far are member states ready to go. The Commission argues for the most possible credible firewall — this is very important for confidence,” he said, adding that what was needed was a holistic approach. “The issue is not yet settled.”

The Italian prime minister Mario Monti brought the same message to German Chancellor Angela Merkel when he met her in Berlin earlier this week, stressing the need for longer-term measures.

The ECB left interest rates unchanged as was expected, having cut them twice over the past few months to a record low for the benchmark rate of 1%. They flooded the banking system with €489 billion of cheap money for three years last month and will repeat the exercise next month.

While the money does not appear to be feeding into the real economy, analysts say banks have increased their purchases of sovereign bonds, representing, as they do, an excellent return on investment.

Borrowing costs have eased across the eurozone and business confidence increased in some countries, including in France where it climbed from a two-year low in December, and Germany, which was unexpected. Exports have also benefited from the weaker euro.

Italy met its target of selling €12bn worth of treasury bills, paying 2.735% on one-year, down from 5.952% in early December. Italy will launch its 2012 bond issuing campaign today when it offers up to €4.75bn of debt, including its three-year benchmark and two off-the-run issues.

Spain sold €9.98bn of three and four-year bonds, paying 3.384% on those maturing in July 2015, down from 5.187% on similar bonds sold last month. It came close to doubling its target of €5bn.

European shares extended gains in response and the euro rose to a session high, but Michael Leister, strategist at DZ Bank in Frankfurt reflected the view of many when he urged caution in reading anything into the auction results.

“Basically the only reason this has been taken down so well is abundant ECB liquidity and with another one coming up in February, just for now, the market seems very complacent,” Reuters quoted him as saying.

All bets are off at the moment on whether Europe is headed for a double dip and how severe it will be. Last month the ECB cut its 2012 growth forecast for the euro area from 1.3% to 0.3%.

— Additional reporting by Reuters and Bloomberg