Italy, Spain ace bond tests as Monti urges growth

Italian and Spanish borrowing costs plunged in their first bond auctions of the year Thursday in a sign of improved market confidence ahead of a European Central Bank meeting expected to hold interest rates steady. The rates paid on Italian 12-month bonds tumbled to 2.735 percent compared to 5.952 percent in the last similar operation in December, while rates for Spanish bonds due in three, four and five years all fell below 4.0 percent. Italy raised 12 billion euros in its auction and Spain nearly 10 billion euros -- double the amount that Madrid had been aiming for. The sales "went very well," analysts at Italy's UniCredit bank said. Italy's auction "reflects a big improvement in market sentiment as well as the effects of the huge liquidity in the system," they said in a note. UniCredit said it was also "an encouraging sign" ahead of another closely watched auction on Friday of longer-term debt on which rates have been very high. Ciaran O'Hagan, a bond strategist at French bank Societe Generale, said the Spanish auction showed that "the tensions that have been weighing on the country for months are beginning to ease." Meanwhile Italian Prime Minister Mario Monti said Europe had to do more to encourage growth aim by drawing inspiration from Britain and Poland and hinted that the ECB should play a bigger role. "Europe is not only about budget discipline. It is very important to move beyond this and to invest constructive political energy in growth," Monti told the Italian parliament, following visits to Paris and Berlin this month. "We have to exploit the full potential of an integrated continent to grow more. And this has not been done up until now. It has not been done by the European institutions or by the biggest member states," he said. Monti said he was planning meetings with British Prime Minister David Cameron and Polish Prime Minister Donald Tusk because their countries had a strong vision of market-oriented growth that Europe could follow. Monti will host French President Nicolas Sarkozy and German Chancellor Angela Merkel in Rome next week ahead of a summit of European leaders on January 29 where the debt crisis will once again take centre stage. He also said that once new European budget discipline rules are in place "it is possible that the European Central Bank... can feel more relaxed" -- an apparent reference to greater ECB assistance. The former European competition commissioner has vowed to make Italy, the eurozone's third largest economy, an international player again. "Italy has to play an active role in helping to bring Europe back to a path of growth and stability," he said in his speech. With a debt mountain of 1.9 trillion euros ($2.4 trillion), an economy headed into recession and alarmingly high borrowing costs, Italy has been a focus for investor concern about the debt-hit eurozone in recent months. Italy has a challenging year ahead on the debt markets as it needs to raise some 450 billion euros and in its last auction of long-term debt last month rates remained close to the danger threshold of 7.0 percent. Financial markets responded positively to Thursday's bond auction, with the Milan stock exchange shooting up more than 3.0 percent while Madrid added 1.55 percent. Borrowing rates on the wider bond markets also eased sharply. Investors were also awaiting an interest rate decision later on Thursday by the ECB, which has cut interest rates the past two months but was widely expected to hold its fire to wait and see what impact those moves were having. Eurozone interest rates are currently at a historical low of 1.0 percent. At its meeting last month, the ECB also offered banks in the eurozone an unlimited amount of liquidity by loosening collateral rules, cutting the minimum reserve ratio and launching new three-year loans at super-cheap rates.