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Spanish bond sale snapped up, Greeks agree wage deal

Source: Reuters - Fri 16th Jul 2010

A wage deal in Greece, a successful Spanish bond auction and a confidence vote win for the Italian government on Thursday raised hopes that the euro zone debt crisis is easing and reforms are taking hold.

Portugal's prime minister also fuelled optimism by saying reforms were producing results and the Slovak government signed up to the euro zone's emergency loan facility, an important part of efforts to restore the confidence of financial markets.

Spain's sale of 3 billion euros of 15-year government bonds followed solid demand this week at auctions in Portugal and Italy and a successful sale of treasury bills in Greece.

Although much depends on the results next week of tests of European banks' resistance to economic shocks, signs are growing that policymakers have - at least for now - staved off the worst dangers of a sovereign debt crisis that began in Greece.

Economists now see a one-in-five possibility of a new recession in Europe, a Reuters poll published on Wednesday found, while European Central Bank Governing Council member Yves Mersch put the chance at zero.

"We totally rule out any double dip or renewed recession setting in," he was quoted as saying on Thursday in the Wall Street Journal.

"We see a much stronger second quarter. We see a certain slowdown in the second half, but which would not put into question the ongoing recovery that we have seen since mid-2009."

BOOSTS FOR ZAPATERO, BERLUSCONI

Investors have punished Spanish bonds in recent months, concerned about the sluggish economy and a deficit that soared to 11.2 percent of gross domestic product at the end of 2009.

But Thursday's sale was at the top end of the Treasury's target range and a source said there was a more than a 50 percent take-up by foreign investors - easing concern among investors that Spanish debt had only attracted demand from domestic banks.

Prime Minister Jose Luis Rodriguez Zapatero will be heartened by the outcome as he tries to push through an austerity budget and see out his term to 2012, despite becoming increasingly unpopular as Spain's battles economic crisis.

"A very good result, and one which will improve risk sentiment" said Peter Chatwell, a strategist at Credit Agricole CIB in London.

The 10-year Spanish bond yield fell 10 basis points to 4.555 percent and its spread against safe-haven German debt narrowed to 186 points from 198.

Italian Prime Minister Silvio Berlusconi was also boosted when his government secured Senate backing by 170 votes to 136 for an unpopular 25-billion-euro austerity plan, averting the prospect of the government resigning.

The austerity budget, which includes pay cuts in the public sector and severe reductions to regional funding, will now go before the lower house, where the government is also planning to call a confidence vote by the end of this month.

Many European leaders are trying to implement austerity measures and face public resistance, but investors are starting to take a new look at European assets as countries start to carry out the reforms.

GREEK WAGE DEAL

In another sign of progress on such reforms, Greek employers and unions signed an agreement on a three-year wage deal and lawmakers extended a tough pension reform to civil servants.

The wage deal foresees a freeze for 2010 and pay rises in line with euro zone inflation in the following two years.

"With this agreement we demonstrate that we can give pay increases in this difficult juncture, sending a message of hope" said Vassilis Korkidis, chairman of trade association ESEE which participated in the negotiations.

The deal could still be unpopular as inflation in Greece was nearly four times that of the euro zone average at 5.2 percent in June.

Another encouraging sign for the euro zone came from Slovakia, whose government yielded to pressure from its European Union partners to drop its resistance to participating in the region's emergency loan facility.

The euro area's poorest member had been holding up the 440-billion-euro European Financial Stability Facility, which is being set up to provide temporary financing to countries in trouble but needs the backing of all the states.

Plenty of other risks remain in the region and, in a sign of declining confidence, Moody's Investor Service cut Portugal's rating by two notches to A1 on Tuesday.

But Portuguese Prime Minister Jose Socrates told parliament that efforts to narrow the budget gap were producing results, even though structural reforms must continue.

Markets are now looking to next week's release of stress tests on 91 European banks, which will assess how well Europe could withstand another financial crisis.

The results are due on July 23. EU finance ministers have been divided over what data should be published while investors worry they may not be stringent enough.

Bank of Italy Governor and ECB policymaker Mario Draghi called for "a maximum of transparency" and said European governments should be "ready to intervene if the results show capital weaknesses and market solutions are not available".