Debt-struck eurozone makes dramatic turnaround

(MADRID) - Portuguese and Spanish sovereign borrowing costs tumbled Thursday, heralding a dramatic market turnaround for debt-laden eurozone nations whose plight once raised fears for the bloc's very survival.

After years of budget cuts and tough reforms to curb soaring debt -- which unleashed mass protests -- fresh hope for economic recovery in Portugal, Spain, Ireland and Italy appeared to have won over buyers on the bond market.

Investors snapped up new bond issues by Portugal and Spain, while the interest rate on their debt fell on the secondary market in which existing bonds are traded day-to-day.

"The risk associated with the eurozone has reduced significantly in the past few months," said Christian Parisot, an economist at Paris-based investment bank Credit Agricole CIB.

European Central Bank president Mario Draghi urged caution, however, as the bank held its key interest rate at a record low 0.25 percent.

"The recovery is there but it is weak, modest and fragile, meaning that there are several risks -- financial, economic, geopolitical, political -- that could undermine easily this recovery," the ECB chief warned in Frankfurt.

"It is still premature to declare any victory," Draghi said.

Falling sovereign yields help to boost economies, spilling over into cheaper loans for business while easing the pressure on governments to impose yet tougher austerity measures on their people.

"There is a broad strong market sentiment which is getting ever more robust and resilient which is positive for the eurozone periphery," said Christian Schulz, senior economist at German private bank Berenberg.

Demand for Portuguese bonds 'outstrips supply'

Portugal, which hopes to exit its 78-billion-euro ($106 billion) bailout programme on May 17, returned to the market on Thursday. It raised 3.25 billion euros in a sale of five-year government bonds to investors via a syndicate of investment banks, the first such deal in a year.

Demand for the Portuguese bonds outstripped supply by more than three-to-one, a banking source said. The rate of return was not immediately divulged.

In day-to-day trading, however, Portugal's five-year yield eased to 4.022 percent in the late afternoon from 4.088 percent the previous evening while the 10-year yield fell to 5.352 percent from 5.412 percent.

Spain's borrowing costs plunged in its first major debt auction of 2014 as it raised 5.3 billion euros in five- and 15-year bonds. The five-year rate dropped to just 2.382 percent from 2.697 percent three weeks earlier.

Day-to-day trading on the secondary markets was more dramatic, with the Spanish five-year bond yield plunging as low as 2.213 percent -- the lowest since it joined the single currency -- from 2.326 percent the evening before.

Spain emerged timidly from recession in the third quarter of 2013, with official data showing growth of 0.1 percent, but the unemployment rate remains painfully high at about 26 percent.

Just two days earlier, Ireland took a major step on the road to economic recovery with its first bond issue since exiting its international rescue programme.

Authorities hailed strong demand in that auction as a sign of renewed appetite for Irish debt.

The yield on Ireland's 10-year government bond in the secondary market fell on Thursday to 3.536 percent from 3.541 percent the previous day.

After international authorities bailed out Portugal and Ireland in 2010, economists warned that Spain or even Italy could be next.

The jitters prompted the European bank to promise it would prevent struggling countries dropping out of the eurozone and defend the single currency come what may.

Economists say this and the tough economic reforms have put the eurozone on the path to recovery.

"Ireland, Portugal, Spain are racing ahead because they have done their homework, they have had their bailouts, they have had their reforms, they had them early," Schulz told AFP.

"Italy is following, it had its reforms a bit later than the rest and maybe not as strong as the rest," he added.

"And Greece and France are behind. Greece because its problems are simply much bigger and France because it has not acted yet."

On the 10-year government bond market, Greek yields eased to 7.705 percent from 7.710 percent.

Italian yields crept up to 3.896 percent from 3.884 percent. French yields edged up to 2.558 percent from 2.510 percent.