Italy, Spain ace first bond tests of 2012

Italy and Spain have aced their first bond auctions of the year as the ECB praised crisis-hit eurozone countries on their progress, but concern swirled over Greece's fate.

Italy raised 12 billion euros ($A14.84 billion) in 12-month bonds on Thursday at rates that were less than half the level at an auction last month, while Spain rustled up nearly 10 billion euros in its sale - double the amount it had been aiming for.

Analysts said the auctions reflected an easing of market jitters as well as the influence of cheap funds made available to crisis-hit banks by the European Central Bank last month, which have encouraged some lenders to buy up bonds.

ECB head Mario Draghi said some of the debt-wracked eurozone countries were making "very substantial, very significant" progress on getting their finances in order and the markets were "showing some appreciation" of the fact.

He said the bank's governing council "welcomes the agreement to move to a stronger economic union" and urged EU leaders to sign the fiscal compact they are negotiating - which would legally bind eurozone governments to curb their deficits - this month.

But relief in Italy and Spain was countered by mounting concern in crisis-struck Greece, where banks that were locked in negotiations on slashing Greece's debt burden said after top-level talks in Athens that time was "running short" for deal.

As European Commission head Jose Manuel Barroso called for an increase in emergency funds for eurozone states, IMF chief Christine Lagarde said aid to Greece would have to be raised by a "significant amount of tens of billions" of euros.

Greece's deputy finance minister Philippos Sahinidis agreed that Athens would need more funds from its European partners if private lenders fail to write off the expected amount of 100 billion euros of its debt.

The single currency bloc has a temporary support mechanism, the European Financial Stability Facility (EFSF), which has about 250 billion euros remaining out of an initial lending capacity of 440 billion euros.

This is not considered enough to aid a large state such as Italy or Spain - the eurozone's third and fourth largest economies - if they got into trouble. Greece, Ireland and Portugal have all received bailouts.

A debate is now under way on whether to preventively beef up the temporary fund or instead boost the EFSF's successor, the permanent European Stability Mechanism (ESM), which will come into operation in July.

German Chancellor Angela Merkel is opposed to pumping in additional funds.

Monti told Merkel on a visit to Berlin on Wednesday that Italy needed concrete assistance to help bring down borrowing costs that have flown higher in recent months, warning there could be an anti-European backlash otherwise.

On Thursday, the former European commissioner said Europe had to do more to encourage economic growth by drawing inspiration also from Britain and Poland and hinted that the ECB should play a bigger role in the future.

"Europe is not only about budget discipline. It is very important to move beyond this and to invest constructive political energy in growth," Monti said.

Monti will host French President Nicolas Sarkozy and Merkel for trilateral talks in Rome next week ahead of a summit of European leaders on January 29 where the debt crisis will once again take centre stage.

With a debt mountain of 1.9 trillion euros, an economy headed into recession and alarmingly high borrowing costs, Italy has been a focus for investor concern about the debt-hit eurozone in recent months.

The country also has a challenging year ahead on the debt markets as it needs to raise some 450 billion euros and in its last auction of long-term debt last month rates remained close to the danger threshold of seven per cent.

Financial markets responded positively to Thursday's bond auctions, with the Milan stock exchange shooting up more than three per cent, while Madrid added 1.53 per cent. Borrowing rates on the wider bond markets also eased sharply.