BBC

Investor concerns over Italy and Spain eased on Monday on hopes that the eurozone authorities would act to lower borrowing costs.

Spain’s 10-year borrowing costs dropped to 6.6% from last week’s record high of 7.5%, reflecting a slight improvement in investor confidence.

Italy paid a lower rate of interest at a bond auction to raise 5.48bn euros (£4.2bn).

The US Treasury Secretary is also in Europe for talks about the crisis.

Timothy Geithner met German Finance Minister Wolfgang Schaeuble on the German island of Sylt, before flying to Frankfurt for talks with the European Central Bank head Mario Draghi.

Italy’s bond auction saw it offload its 10-year bonds at an interest rate of 5.96%, the first time it has sold them below 6% since April.

However, Richard McGuire, a rate strategist at Rabobank, said the interest rate Italy was paying to sell its debt was still too high.

“While these sales do provide some indication of an easing of tensions at the periphery, they also show considerable further progress on this front is needed,” Mr McGuire added.

Meanwhile, official data showed that Spain’s economy shrank 0.4% in the second quarter of the year.

That compares with a 0.3% contraction in gross domestic product (GDP) in the first three months of the year.

The national statistics institute INE, which published the figures, said the worsening GDP figures reflected “weaker domestic demand”.

Nonetheless markets rose, boosted by continued speculation that action will be taken by eurozone authorities to cut borrowing costs for countries such as Spain and Italy.

Spain’s Ibex 35 index was up 1.8%, France’s Cac-40 up 0.7% and Germany’s Dax up 0.9%.

However, Commerzbank rate strategist Rainer Guntermann cautioned that the market rally may not continue.

“Expectations are high… but for the rally to continue we may need more colour, more details and maybe some action,” said Mr Guntermann.

Eurogroup leader Jean-Claude Juncker, who has called for the European Central Bank (ECB) to act to cut Spain’s debt costs, told German and French press in interviews published late on Sunday: “We will work in close agreement with the ECB, and we will, as ECB President Mario Draghi said, see results.

“I don’t want to drive expectations, but I must say, we have reached a decisive phase.”

On Thursday, the ECB will announce its latest decision on interest rates and there is speculation that it may also announce that it is restarting its bond-buying programme, known as the Securities Markets Programme (SMP).

Under the SMP, the ECB buys government debt from banks on the commercial market, which helps to bring down the cost of borrowing for governments without the ECB having to lend directly to them.

The SMP was suspended at the end of January.

Mr Juncker also referred to agreements at the last European Union summit regarding the European bailout fund, the EFSF.

Under the EFSF’s constitution, the fund is permitted to buy government bonds on the primary market, effectively lending directly to indebted governments such as Spain.

This is important because the European Central Bank’s constitution prevents it from lending money directly to governments.

It is now hoped that co-ordinated action between the ECB and the EFSF would be more effective in bringing down the borrowing costs of countries such as Spain and Italy.