Tension tightens on Spanish, Italian bonds

Borrowing rates for Spain and Italy firmed on Friday after several days of respite, after an inconclusive meeting of eurozone ministers and before key talks in Rome.

Borrowing rates for Spain and Italy firmed on Friday after several days of respite, after an inconclusive meeting of eurozone ministers and before key talks in Rome.

Spain is fighting to avoid needing a full national debt rescue and is expected at any time to detail a request to EU authorities for help for its banking system.

The rate which Spain must offer to borrow money for 10 years, as indicated on the secondary bond market, firmed to 6.612 percent from 6.568 percent at the close on Thursday.

The yield on 10-year Italian debt rose to 5.815 percent from 5.734 percent.

The yield on 10-year German debt, the benchmark for the eurozone, fell to 1.528 percent from 1.533 percent and for French 10-year bonds to 2.609 percent from 2.634 percent.

At Credit Agricole CIB, economist Orlando Green said: "The (eurozone) bond market remains very dependent on what European politicians say."

A meeting of eurozone finance ministers late on Thursday did not answer all questions about how a rescue for Spanish banks would work in detail.

The ministers urged Spain to make a formal request for help as soon as possible.

An independent audit published on Thursday said that Spanish banks would need maximum help of 62 billion euros ($77.8 billion), less than expected on financial markets and less than an amount of up to about 100 billion euros offered by the eurozone.

Green said that the audit was "quite transparent" but that the main outstanding question concerned the amount of help from the European Union, even though it was now clear that this would come first from the European Financial Stability Facility and then from the European Stability Mechanism.

Tension on the eurozone bond market had eased in the last few days, partly because of expectations that the EFSF might begin buying government bonds.

This approach, to increase demand for bonds on the secondary market issued by governments under pressure and so reducing the interest rate, was expected to be pushed by Italian Prime Minister Mario Monti at a meeting in Rome later in the day with the leaders of Germany, Spain and France.

"The 10-year yield for Spain has eased by a quarter of a percentage point on each of the last three days," Green said.

"It is difficult to see how that can continue at such a rate, before the summit next week," he added, referring to a summit of the 27 European Union countries on June 28 and 29.

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