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Relief in eurozone as France and Spain secure funds in critical bond auction

• Madrid and Paris succeed in rolling over €13bn in debt
• Interest rates significantly lower than last year
• Ireland also praised for performance on austerity targets

France and Spain have cleared major funding tests, steadying volatile markets and giving some much-needed cheer to the embattled eurozone.

Paris and Madrid secured €13bn (£10.8bn) of funding between them in bond auctions at significantly lower interest rates than last year, despite a downgrade by the ratings agency Standard & Poor’s last week that sparked fears of a run on the euro and the collapse of several banks.

Stock markets rose on the news, with the FTSE 100 finishing the day up 38 points at 5741.15, while the German Dax rose 1%. The Paris CAC regained some of its losses in recent months with a 2% rise to 3328.94.

Ireland added to the positive mood when it was described as the “poster child” for the International Monetary Fund and the European Union following a favourable review of its path to economic recovery.

A joint report by the IMF, the European Central Bank (ECB) and the European Union, known as the “troika”, said Ireland was on track to meet the targets its international partners had set down as part of the country’s multibillion-euro bailout.

Following their review of the nation’s accounts, the troika concluded that budget cuts to the tune of 3.5% of Ireland’s GDP had reduced the estimated general government deficit to about 10%. This, they said, was “well within the programme target of 10.6%”.

However, the troika added a note of caution, acknowledging that Ireland faced “considerable challenges” as domestic demand remained subdued, unemployment was high, and growth in its main trading partners was slowing.

The atmosphere within the eurozone remains fraught, as talks between Greece and its creditors remain deadlocked.

The head of the ECB, Mario Draghi, described the situation as fragile. “We see a softening business cycle in Europe with significant downside risk. We also see some tentative signs … but I have to be quite cautious here … some tentative signs of stabilisation of economic activity at low levels,” he said.

“All this is subject to downside risk: in other words, it can get worse.”

The bond auctions by France and Spain signalled that markets have largely shrugged off S&P’s warnings that Europe’s situation has become more precarious.

JP Morgan said in a report that markets were underestimating the power of the ECB to underwrite investments in sovereign bonds with its new lending scheme for banks. Eurozone banks have deposited more than €500bn of assets with the ECB in return for cash, which many of them have invested in sovereign bonds.

Italian and Spanish banks have seized half of the total made available by the ECB as they seek to shore up their fragile finances. Analysts at JP Morgan said the move had proved effective as a way to encourage lending inside the eurozone while politicians agree a new fiscal pact.

EU leaders are expected to meet in Brussels on 30 January to hammer out a deal for a bigger bailout fund and enhanced economic and fiscal rules in the eurozone.

Richard McGuire, strategist at Rabobank in London, said: “These results are bullish for both Spain and the broader periphery. For now the glass-half-full brigade have the upper hand.”

Draghi said: “We start seeing also a fall of the longer-term part of the yield curve as well. I think that by and large, this measure has really avoided a serious funding crisis that European banks might have to face.”

Negotiators in Greece finished a second day of talks without agreement, with creditors holding out for a higher interest rate on outstanding loans after having accepted a 50% debt write-off. Athens has argued it is unable to pay more than 3.5%, but bondholders reject that as too low, one source told Reuters.

A senior Greek official also played down speculation that a deal had been nearly pinned down, saying: “Nothing has been concluded yet.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds