The International Monetary Fund was forced to deny yesterday that it was preparing to rescue Italy, although speculation about outside help, along with signs a stricter fiscal regime could be on the cards in the eurozone, took the heat off stock and bond markets.
The IMF said there were "no discussions with Italian authorities on a programme for IMF financing", batting down weekend reports the organisation was preparing Italian aid worth up to €600bn (£515bn).
Despite the denial, however, Rome's cost of borrowing fell back as speculation of an international lifeline led to some relief among investors, with the yield on Italy's two-year bonds falling below the 8 per cent level seen last week.
In another sign of relief, stock markets rallied, with the FTSE 100 up by nearly 3 per cent and European stocks up by more than 3 per cent. Spanish bond yields also fell back last night.
But the jitters were obvious in the background, as the two-year Italian yield remained above the 10-year yield, a sign that investors remain worried about the prospect of losing their money. The movements came as markets looked ahead to today's meeting of eurozone finance ministers in Brussels.
Signs that Germany and France were progressing on plans for strict powers over national budgets that breach EU rules were also welcomed by investors. This helped offset the impact of a warning from Moody's that an escalation in the debt crisis could threaten sovereign credit ratings across the eurozone.
Germany and France aim to outline the plans before a European union summit next week . "We are working for the creation of a stability union," the German finance ministry said.
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