Confidence in euro zone improves despite downgrades

France and Spain sailed through their first bond market tests since Standard & Poor's downgraded their credit ratings recently, a sign that politicians and central bankers have at least temporarily stemmed the spread of Europe's debt crisis. Worries about the 17-nation euro zone have receded since the start of the year, with stocks rallying consistently and bond yields — the rate countries pay to borrow — sliding. Analysts warn, however, that those gains may simply be riding an absence of bad news — a looming recession could hinder efforts to slash deficits while Greece depends on a deal with banks to avoid a disastrous default this spring. Spain and France held successful short-term debt auctions earlier in the week. Spain's success is at least partially thanks to the European Central Bank's massive injection of cheap money into the financial sector in December and its regular purchases of Spanish and Italian debt. But the latest auctions on Thursday were for longer-term bonds and were considered the first real tests of confidence in those countries. Both easily hit their targets thanks to strong demand, while the borrowing rates fell, an indication investors are still happy to invest in them and have largely shrugged off S&P's decision to downgrade nine euro zone countries because of concerns over Europe's ability to get a grip on the crisis. The auction results also boosted confidence in the region's banks, particularly those that are heavily exposed to bonds in countries like Greece and Italy. Shares in France's Societe Generale soared 13.2 percent and Italy's UniCredit 12.9 percent. Germany's Commerzbank jumped 14.8 percent after it said it would be able to increase its capital cushions without government help. Despite the raft of good news, Howard Wheeldon, an analyst with BGC Partners, warned that "time is running out" to find a true solution to Europe's problems, which he said lies only with increased support in bond markets from the European Central Bank. The bank has intervened only in limited ways, saying its mandate does not allow it to go on the kind of bond-buying spree that the US Federal Reserve has, for instance. "The solution to Europe's crisis must come through partner agreement that enables the European Central Bank to be given a proper mandate to act," he said. "Meanwhile all that Europe has essentially agreed so far is what in air traffic parlance would be regarded as achieving a holding pattern." Greece's ability to avoid default is one of the main unresolved issues. The Greek government this week restarted debt negotiations with its private creditors to persuade them to take at least 50 percent losses on their Greek bonds. The talks had faltered recently but will need to produce a deal if Greece is to avoid default this spring — the European countries ponying up the money for bailout loans have said they won't make up the difference. Greece is in a unique situation because it's clear it can never pay back all the money it owes, and so is asking banks to forgive some of its debt. A rise in government borrowing rates has been at the heart of Europe's debt crisis, and three countries — Greece, Ireland and Portugal — have been forced to seek bailout loans to avoid bankruptcy when they could no longer afford to raise money in markets. There had been concerns last summer that Spain and Italy would be the next to be squeezed out of markets and that the crisis would then knock at France's door. Pressure has eased considerably since then, but Spain is still struggling with a swollen deficit and eurozone-high 21.5 percent unemployment rate. The yield on Spain's 10-year bonds hit nearly 7 percent late last year, while Italy's traded well above that level, before an ECB bond-buying program helped to drive them down. Changes of government in both Madrid and Rome have also helped restore confidence in the countries' ability to pass reforms and reactivate their ailing economies. On Thursday, Spain's Treasury raised €6.6 billion ($8.5 billion) from markets, much more than its initial aim of between €3.5 billion and €4.5 billion, in debt maturing in 2016, 2019 and 2022. The interest rate on the 10-year bonds was 5.40 percent, down from 5.54 percent in the last such auction in December, while demand was 2.2 times the amount on offer. France's situation is far less serious than Spain's but as the eurozone's second-largest economy any hint that it is struggling to fund itself would be disastrous for market confidence in the euro. Last year, the benchmark yield on its 10-year bonds rose to near 4 percent, almost twice Germany's. But the new year has brought that rate down closer to 3 percent and on Thursday, France easily sold €9.5 billion ($12.2 billion) in bonds. The interest rates on the two-year, three-year, four-year and 10-year bonds the Treasury sold all fell significantly. The rate on 30-year inflation-linked bonds held steady. Though S&P's downgrade hasn't had a big impact in the markets, the loss of the AAA rating was a severe blow to France's self-image and is shaping up to be a major factor in presidential elections this spring. President Nicolas Sarkozy's government has brushed it off as only a minor setback and noted that the other two major agencies have maintained France's AAA. "In these circumstances, the only solution is calm, distance, courage, the courage to make decisions," Sarkozy told business leaders Thursday. "It's not the agencies that make state policy." But the opposition Socialists, whose candidate Francois Hollande is leading polls, have been using it as a rallying cry, saying it reflects the failure of Sarkozy's policies.