Italian debt under 6pc on €30bn austerity package
ITALY'S borrowing costs fell to the lowest level in four months yesterday, after the country proposed a €30bn austerity package.
Borrowing costs fell below 6pc for Italy and dropped to almost 5pc for the Spanish government, as investor confidence that a solution will be found for the debt crisis soared.
Both countries have seen borrowing costs rise over the 7pc over the last two months. It's seen as an unsustainable cost of funding.
Yesterday's huge swings in the markets came after the French and German leaders said that they were in favour of dropping a demand that losses should be forced on lenders to countries that seek bailout deals after 2013.
The bond market staged a sharp recovery on hopes that European leaders can agree on a plan to contain the region's debt crisis when they meet later this week in Brussels.
Italian 10-year yields dropped the most in almost four months after Prime Minister Mario Monti announced €30bn of measures to cut the nation's debt load.
Belgian and French borrowing costs also got a boost after German Chancellor Angela Merkel and France's President Nicolas Sarkozy pushed for a rewrite of the European Union's governing treaties.
Germany and the Netherlands held successful auctions of government debt at record low prices.
"The market is betting a lot on a positive outcome at the end of the week after the leaders' summit and that's supporting peripheral bonds," said Gianluca Ziglio, a strategist at UBS.
"The Italian budget measures seem to go in the right direction, especially in terms of the size."
Spain's 10-year borrowing costs fell by over 0.5pc yesterday. Italy's dropped by close to 0.75pc.
Both countries have seen borrowing costs fall in recent days, building confidence that both may be able to continue financing themselves in the markets and not be forced into bailout deals.
The better mood is driven in part by a fear in the markets of being caught on the wrong side if there is an even bigger markets recovery next week.
ECB President Mario Draghi signalled last week he would support the markets in a significant way if European leaders make progress on tighter budget rules later this week.
If that happens, investors that have bet on prices falling stand to be stuck with big losses.
The better mood was helped after Mr Monti presented his €30bn austerity package to the Italian parliament and senate yesterday, after getting backing from his cabinet for the measures on Sunday.
The package includes overhauling the pension system, a crackdown on tax evasion, and cuts to government spending
"Without this package Italy would collapse and would end up in a situation similar to that of Greece," Mr Monti said. (Additional reporting Bloomberg)