Bond markets give Eurozone a brief respite

Europe won modest respite from its debt crisis Wednesday, as Germany and Portugal borrowed with relative ease ahead of a hazard-filled few weeks for the 17 nations that use the euro.

But Greece's new prime minister warned that his debt-crippled country has only three months to come up with new reforms so Greece can stay in the Eurozone and avoid a potential default - a reminder of how the crisis can flare up at any time. And the news that a major Italian bank had to offer an unexpectedly large discount to raise new capital showed just how wary investors are of Europe's shaky banks.

So far this year, markets have pushed concerns about Europe to one side, especially as countries have managed to raise the money they need.

Germany, the biggest contributor in Europe's bailouts, managed to sell €4.06 billion ($5.3 billion) in its benchmark ten-year bonds Wednesday at an average yield of 1.93 per cent, down on the previous 1.98 per cent it had to pay. And Portugal, which was bailed out last April, paid a markedly lower interest rate to borrow €1 billion ($1.3 billion) in three-month treasury bills.

Tumbling share price

But Italian bank UniCredit saw its share price tumble over 10 per cent on the news it was selling new shares at a large 69 per cent discount to Tuesday's closing price. UniCredit is trying to raise €7.5 billion ($9.8 billion) to meet new European requirements for banks to thicken their financial cushions against possible losses.

Banks are an integral part of the debt crisis because they hold government bonds. A default or steep fall in the value of government bonds could inflict heavy losses on banks and choke off credit to the European economy. That's why the regulatory authorities want Europe's banks to raise their buffers by €115 billion ($150 billion) over the next few months.

The German and Portuguese auctions come ahead of severe tests for Eurozone leaders as they try to navigate their way out of a crisis over too much debt in some countries.

Eurozone governments are struggling to convince financial markets that indebted governments will not default and should be able to borrow at affordable rates to repay debts as they come due. Greece, Ireland and Portugal have needed bailouts, while much larger Italy and Spain have seen their borrowing costs rise ominously.

Italy, the recent focus of the crisis, must borrow to cover €53 billion ($69 billion) in expiring debt in the first quarter alone in debt auctions beginning January 13. That will test whether the government of new Prime Minister Mario Monti is making progress in regaining market confidence through budget cuts and efforts to improve weak economic growth.