The plan of ECB president, Mario Draghi, for the purchase of government bonds is more successful in keeping borrowing costs of countries like France and Belgium lower than to convince investors to give cheaper money to Spain and Italy, writes Bloomberg. The three-year Spanish bond yield went up to 3.83% after it fell to 3.37% on September 7, just one day after Mario Draghi presented details of its proposed acquisition of unlimited bonds of countries that accepted economic conditions in exchange. French debt insurance costs fell during this period by 24%, nearly double the 13% drop for Italy.
“What Draghi has done has been beneficial to some degree, but there’s still skepticism in the market because Spain hasn’t taken the final step and asked for help. It doesn’t change the fact Spain still has a huge problem to tackle. France and Belgium are seen as a safer play,” said Adrian Owens, from London firm GAM, which oversees assets of $62 billion.
Spain’s two-year securities yield is 3.14% compared to 0.24% for France. Italy has a two-year funding cost of 2.18%, six times higher than the 0.35% in the case of Belgium.
“ECB plan sounds aggressive and the markets rose initially, because investors don’t want to stand in the way of resolving the situation. They later realized that it does not block anything. First you have to go through a process. They believe that Spain will not accept it, unless it will be forced by the market,” said John Wraith, an analyst at Bank of America Merrill Lynch.
Spain had worse performance than Ireland, a country praised by the EU for economic reforms. Irish bonds have made investors a gain of 4.6% since the ECB announcement, triple the 1.5% for Spanish bonds, according to Bank of America Merrill Lynch indexes. Italian bonds made 1.7%. Ireland has sold bonds in July, returning to financial markets for the first time in almost two years.
Euro area sovereign debt crisis began in 2009, after a new government in Greece announced that country’s budget deficit is twice higher than originally revealed. Subsequently, Greece, Ireland, Portugal, Spain and Cyprus were forced to seek external financial assistance. Spain asked already up to €100 billion to strengthen its banking system.
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