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Strong demand for Spanish and Italian debt sees borrowing costs fall

Spain and Italy auction off $28 billion in their first real debt demand test of 2012.

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Analysts say the heavy demand for Spanish and Italian debt at today’s auctions was helped by the amount of money the European Central Bank (ECB) has pumped into the system. (Ralph Orlowski/Getty Images)

Financial markets and the euro got a lift on Thursday as Spain and Italy successfully auctioned off nearly $28 billion dollars in bond sales and saw their borrowing costs drop sharply in 2012’s first real test for debt from two of the euro zone’s most struggling economies.

Spain’s Treasury said it sold a total of $12.7 billion of bonds maturing in 2015 and 2016 – double the amount sought.

Its yields fell about 1 percentage point from previous auctions, to an average interest rate of below 4%, according to the Associated Press and the BBC.

Italy sold $15 billion, with its yields on 12-month bonds falling to 2.735 percent, down by half since its last similar auction in December.

The sales reflect renewed confidence in both countries’ efforts to tackle their debt problems, with newly-appointed governments implementing budget cuts and other austerity measures to cut their respective deficits.

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Analysts say that the heavy demand for Spanish and Italian debt at today’s auctions was also helped by the amount of money the European Central Bank (ECB) has pumped into the system, the BBC reported.

The ECB provided euro zone banks with $643 billion in late December in “long-term refinancing operations” (LTRO) in order to tackle the euro zone debt crisis. More money will be made available in February.

Today the bank announced that it was leaving its benchmark lending rate on the euro unchanged at 1 percent, to assess the impact of cuts and other measures implemented last year to tackle the euro zone debt crisis.

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According to Reuters, successful auctions had been expected after traders supported solid domestic purchasing of Spanish paper this week in the secondary market.

Market reaction to today’s bond auctions was positive, the Associated Press reported. In the secondary market the yield for Italy’s 10-year bond dropped from around 7 percent to 6.6 percent, while the rate on Spanish bonds of the same maturity dropped to 5.15 percent after opening at 5.32 percent.

However, analysts consider both rates unsustainable in the medium and longer term, according to The New York Times.

http://www.globalpost.com/dispatch/news/business-tech/debt-crisis/120112/strong-demand-spanish-and-italian-debt-sees-borrowing