The cost of borrowing for 10 years for Spain and Italy fell sharply on the eurozone bond market early yesterday after eurozone leaders agreed breakthrough measures to fight the debt crisis.
The interest rate or yield on 10-year Spanish debt fell to 6.466 percent from 6.896 percent late on Thursday.
The Italian 10-year yield fell to 5.865 percent from 6.182 percent.
A key aim of the EU summit in Brussels was to douse the debt crisis hitting Spain and threatening Italy, by reassuring markets about short-term action to relieve pressures on governments and long-term measures to tighten financial discipline.
“The summit is a clear success. It goes very clearly in the right direction because at last it puts in place efficient tools in the long term,” Natixis bank bond strategist Rene Defossez said.
Referring to a decision enabling the EU rescue fund European Financial Stability Facility and its successor, the European Stability Mechanism, to recapitalize banks directly — under conditions — he said: “This is extremely important because a bank which has to be recapitalized will no longer add to the strains on the public finances of a nation.”
Analysts at Saxo Bank commented on a decision that the European Stability Mechanism fund would not be a preferential creditor. This was seen as reassuring investors reluctant to buy Spanish debt for fear they would be last in line for repayment if Spain ever defaulted.
The Saxo Bank analysts said that this was of “capital” importance.
“One of the major problems for Greece was that official lenders wanted to have priority over existing creditors and that immediately hit Greek sovereign debt,” the analysts added.
Earlier this week, the Spanish government, which had just requested EU help for its banking sector, admitted that it could not continue to finance itself at high prevailing rates.
The difference between the rate which Italy must pay to borrow for 10 years and the rate Germany must pay fell to 4.26 percentage points from 4.658 points on Thursday.