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Spain, Italy on the mend? Investors make it easier to borrow

Spain and Italy hit their borrowing targets today, benefiting from favorable lending rates that signal eurozone investors' cautious confidence. 

The eurozone heaved a sigh of relief today: Italy and Spain, the eurozone's third- and fourth-largest economies, were able to borrow fresh money at surprisingly favorable terms, indicating growing confidence about their economic prospects.聽

In anxiously expected bond auctions, Spain raised 鈧�10 billion ($12.8 billion), double its target, according to the Spanish Treasury. Italy reached its target of 鈧�12 billion ($15.3 billion). And the much-needed cash came at a very good price. The interest rates for the Spanish bonds ranged from 3.3 to 4 percent, while Italy has to pay between 1.6 and 2.7 percent interest, depending on the duration of the bonds.聽

The two countries have been struggling to decrease their debt load, but high borrowing rates have been an obstacle.聽Only a month or so ago, both countries had to pay more than 6 percent interest to sell their sovereign papers. At times, the interest rates surpassed the 7 percent mark, which is generally regarded as the level at which borrowing becomes unsustainable.聽

鈥淲e are seeing light at the end of the tunnel that is the euro crisis,鈥� says Robert Halver, an analyst with Baader Bank in Frankfurt. 鈥淭his is due to the intervention by the European Central Bank.鈥�

The ECB provided banks with almost 鈧�500 billion in three-year loans last December and announced it would offer the same amount early in 2012.

In a meeting with German Chancellor Angela Merkel yesterday, before the bond auction,聽Italian Prime Minister Mario Monti complained that despite Italy's painful efforts to cut costs, it 鈥済ot nothing in return from Europe, such as a drop in interest rates."聽

Mr. Monti,聽who followed Silvio Berlusconi after he resigned from his post in November,聽began initiating structural reforms and imposing an austerity package almost immediately after taking office. The measures are projected to聽save 鈧�33 billion ($42 billion).

"I hope that a reduction in interest rates will become a reality on the markets," Monti said. "They were justified as long as there was mistrust against Italy. But now, they're no longer legitimate, as everyone says that our efforts have been good."聽聽

Spain, too, attributed the success of the bond sale to the austerity program initiated by its recently elected Prime Minister Mariano Rajoy. 鈥淪uccess for Rajoy鈥檚 measures: Spain makes twice the amount predicted in bond auction鈥� read a headline on the website of the center-right newspaper ABC.

It is a welcome boost for Mr. Rajoy鈥檚 government, which only took over in December. For many Spaniards, the year started on a low: increases in taxes on income and real estate, longer hours without a pay raise for state employees, and a cut to unemployment benefits. Only yesterday, the Spanish parliament approved Rajoy鈥檚 austerity measures worth 鈧�15 billion ($19.1 billion).

Still, the country is expected to slide into recession in 2012.

聽鈥淭his is a short-term success,鈥� says Hans-Peter Burghof, chairman of the Banking and Finance Department at the University of Hohenheim. 鈥淲hether it turns into a long-term one does not depend on the ECB or the International Monetary Fund or any such institution. It depends solely on the credibility of the governments in question: Are they willing to see through their structural reform plans?鈥�

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