ECB eases debt worries but flight to safety continues

Borrowing costs for Italy and Spain fell yesterday after the European Central Bank widened the scope of its intervention the bond markets.

The move gave confidence to investors, who were asking for little as 5.24 per cent interest to lend money to Rome for 10 years yesterday, and for as little as 5.1 per cent for Spain. Last week, the two countries were facing costs of more that 6 per cent, a level seen as unsustainable by analysts.

The ECB made its first move in the morning, according to traders, who said it appeared to have bought around €2bn in Italian and Spain debt. There were also signs of a second round of intervention in the afternoon.

"Speculators will now have to think twice about selling or shorting Italian and Spanish bonds, knowing the ECB will be acting against them," Shane Oliver, head of investment strategy at the fund manager AMP Capital Investors, said.

Although the ECB broke its 18-week hiatus from the bond markets last week, it limited its action to Portuguese and Irish debt. The reluctance – attributed a desire among monetary policymakers to see faster reforms in debt-ridden countries – triggered a sell off around Italian and Spanish. Traders said that, until the EU's bailout fund had the authority to buy bonds, the ECB was the only body capable of soothing the markets.

But hopes of an intervention were raised after the Italian Prime Minister Silvio Berlusconi pledged to speed up reforms later on Friday. The action was confirmed in an ECB statement on Sunday night.

Despite the ECB action, however, investors remained nervous about the endgame for the EU debt crisis, the health of the global economy and the potential destabilising effect of the US losing its AAA credit rating.

Still, far from pushing interest rates higher, the Standard & Poor's downgrade of US government debt did nothing to dampen investors' view that it remains one of the safest assets available in times of turmoil. Demand for Treasuries pushed prices higher.

Traders remained wary of the knock-on effects of the US downgrade, though, as S&P moved to cut its rating on scores of other bonds, including Fannie Mae and Freddie Mac, the state-backed mortgage finance houses.