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A trader reacts as he looks at screens during trading at the Madrid bourse.


Successful government debt auctions in Spain, Italy and the Netherlands on Tuesday soothed frayed nerves following the collapse of the Dutch government over fiscal austerity wrangles and France's first round elections.

The Netherlands sold €1-billion of notes maturing in 2014 at an average yield of 0.523 per cent, and €995-million of bonds maturing in 2037 at an average yield of 2.782 per cent.

Italy sold €2.5-billion of 2014 debt at a yield of 3.35 per cent - about 1 percentage point higher than at a similar auction on March 27 - and €943-million of inflation-linked bonds due in 2017 and 2019. Spain sold €1.9-billion of three month and six month bills, close to its maximum target of €2-billion, but also at sharply higher cost

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Despite Spain and Italy's rising borrowing costs, the auctions helped send the countries' bond yields down across the curve.

The two-year Dutch composite bond yield shed 15 basis points to 0.36 per cent, and the 10-year benchmark bond dropped 9 bp to yield 2.31 per cent. Spain's 10-year benchmark fell 8 bp to yield 5.87 per cent, and Italy's comparable bond dropped 4 bp to yield 5.66 per cent. Meanwhile, German 10-year bund yields, which hit an all-time low on Monday, edged up.

The Dutch parliament will meet today to discuss the collapse of the government, but JK de Jager, the Dutch finance minister, sought to allay investor concerns over one of the few remaining 'triple-A' rated European countries, telling reporters "the Netherlands, in every circumstance, will maintain disciplined budgetary policy".

However, Société Générale analysts warned that the collapse of the Dutch government could have significant implications, but just for the Netherlands but for the wider euro zone.

"The political vacuum left by Rutte's cabinet and the sombre IMF analysis of the country's public finances, mean that a downgrade is more likely than not by the time the next government is sworn in," the bank's analysts said in a note. "There are [also]wider implications in that it shows how the battle over fiscal control and the implementation of austerity has intensified."

Spain's challenges are even more daunting. Although the country was able to borrow almost its maximum target on Tuesday, its borrowing costs remain elevated, and analysts fret that its banks may be running out of European Central Bank-supplied firepower to support all this year's debt auctions.

Coupled with its fiscal and economic woes, this has moved Spain to the forefront of investor concerns in Europe, with some suggesting that the country may need help from the other euro zone members or more drastic action from the central bank.

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Yet Jens Weidmann, the Bundesbank president said in a speech that "monetary policy is not a panacea and central bank firepower is not unlimited".

"We can only win back confidence if we bring down excessive deficits and boost competiveness," he added. "And it is precisely because these things are unpopular that makes it so tempting for politicians to rely instead on monetary accommodation."

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