Italian bond sale shows investors’ faith in ECB

A successful Italian bond auction yesterday pointed to confidence among investors the ECB will keep its word and take strong enough measures to get a grip on the eurozone’s debt crisis.

In Beijing, German chancellor Angela Merkel appeared to temper China’s fears about the damage the crisis could wreak on the world economy, while French president François Hollande, on a visit to Madrid, said he could see a case for ECB intervention.

Since ECB president Mario Draghi vowed a month ago to do whatever it takes to save the euro, Spanish and Italian bond yields have fallen markedly.

At a policy meeting next week, Mr Draghi is expected to reveal the ECB’s terms of engagement for intervening in the bond market, reconciling an unwilling German Bundesbank to the plan while avoiding conditions that will scupper its effectiveness.

Credible ECB action to lower Italian and Spanish borrowing costs would buy the two countries time to reduce their debt and push through economic reforms to boost growth potential.

Italy sold €7.29bn of debt and shifted the maximum targeted amount of a new 10-year bond at a yield well under its 6% pain threshold.

Chinese premier Wen Jiabao said a briefing by Ms Merkel had assuaged his concerns slightly, but no quick resolution of the crisis was in sight. “The main worries are two-fold: first is whether Greece will leave the eurozone. The second is whether Italy and Spain will take comprehensive rescue measures,” Wen said.

“After I heard her views, it increased my confidence. But I must honestly say, the implementation of these measures won’t be completely smooth.”

China could be prepared to buy more EU government bonds after evaluating the prevailing risks, he said.

Mr Draghi has said the ECB will buy Spanish and Italian bonds if called upon but that any recipient country must first seek help from the eurozone’s rescue fund, to which conditions will be attached.

Ms Merkel has signalled her backing for his strategy despite warnings from Bundesbank chief Jens Weidmann that to do so would risk letting indebted euro zone governments off the hook for the austerity measures and reforms needed.

Sources say Mr Weidmann is short of allies within the ECB and could not block the scheme, but if his concerns are not met, ongoing Bundesbank criticism could undermine it.

— Reuters