Bond yields fall as Obama intervention eases fears
European markets rally but doubts remain with investors over how long recovery will last
Published 12/11/2011 | 05:00
BORROWING costs for many European countries, including Italy and Ireland, dropped as the week ended after the US president made a direct intervention in the eurozone debt crisis.
Italy's bond yields dropped to 6.46pc as tensions the country could be heading towards a rescue programme eased, at least for now. Irish bond yields dropped 12 basis points to 7.7pc.
As Italy's parliament rushed through austerity measures, President Barack Obama phoned German chancellor Angela Merkel and French president Nicolas Sarkozy late on Thursday night urging action over the crisis. The content of the calls was not disclosed. President Giorgio Napolitano was also involved in discussions with Mr Obama.
Italy's senate approved a new budget law, clearing the way for approval of the package in the lower house today and the formation of an emergency government to replace that of prime minister Silvio Berlusconi.
In Athens, former ECB policymaker Lucas Papademos was sworn in as Greek prime minister after days of political wrangling, tasked with meeting the terms of a bailout plan to avert bankruptcy.
"The crisis in Europe remains the central challenge to global growth. It is crucial that Europe move quickly to put in place a strong plan to restore financial stability," US treasury secretary Timothy Geithner said.
After months of delay, Rome appears to have got the message as bond markets pushed it to the brink of needing a bailout that the eurozone cannot afford.
If the votes pass smoothly, Napolitano will accept Berlusconi's resignation over the weekend and ask veteran former European commissioner Mario Monti to form a government. Berlusconi has promised to resign after the financial stability law is passed by both houses of parliament.
He had insisted on early elections but then softened his stance. Markets were calmed by the prospect that there would be an interim government, rather than a three-month vacuum before elections are held.
European shares also rose in relief, with Italian banks like Intesa Sanpaolo rallying. But investors doubted the recovery would last.
"We can have maybe two or three days of calm -- in inverted commas -- but nothing has really changed underneath," one bond trader said.
Spain, the eurozone's fourth largest economy, which holds elections in nine days, stopped growing in the third quarter, putting its deficit-reduction goals in doubt.
With European leaders dithering over how to tackle the deepening crisis, pressure has mounted on the European Central Bank to act more forcefully by becoming a full lender of last resort like the US Federal Reserve and Bank of England.
Three senior ECB policymakers on Thursday rebuffed arm-twisting from investors and world leaders to intervene massively on bond markets.
German economy minister Philipp Roesler said yesterday the ECB did not have "unlimited firepower." Berlin strongly opposes the ECB taking on a broader role, arguing this would compromise its independence.