UPDATE 1-Euro zone bond yields steady; focus remains on recovery fund

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds Ifo survey, updates prices)

By Yoruk Bahceli

LONDON, May 25 (Reuters) – Euro zone bond yields were steady on Monday, as the market overlooked a paper from Austria, Sweden, Denmark and the Netherlands opposing the EU’s planned grants-based recovery fund and awaited the European Commission’s own release later this week.

The four countries outlined in more detail on Saturday their previously voiced opposition to France and Germany’s proposal for a 500 billion euro ($544 billion) European Union recovery fund, which would issue grants to the regions worst hit by the coronavirus pandemic.

“We propose to create an Emergency Recovery Fund based on a ‘loans for loans’ approach,” the four countries said in a so-called non-paper outlining their position.

They said the fund should not lead to any mutualisation of debt and should be of a temporary, one-off nature with an explicit sunset clause after two years.

The Franco-German proposal’s inclusion of grants, rather than loans, boosted Italian bonds last week to their best performance in eight weeks.

EU grants would not count towards Italy’s hefty debt pile, which investors have worried may become unsustainable should Rome be liable for its coronavirus stimulus spending in full.

The European Commision is due to release its recovery plan on Wednesday.

Eurogroup chief Mario Centeno said the Franco-German recovery fund plan would be a good step towards a fiscal union of the bloc.

“The headlines from the Commission should remain promising for the periphery… but the counter-initiative from the “Frugal Four” underscores that reaching unanimity about the details of “how to fund it” remains an uphill struggle into the EU summit later in June,” Commerzbank analysts told clients.

The Ifo institute’s closely watched business climate index rebounded more than expected in May, recovering from its most dramatic fall on record the previous month, as a gradual lifting of lockdowns boosted corporate expectations.

Bond yields in the bloc, which have been showing little reaction to recent data releases, were relatively stable on Monday, with Italy’s 10-year yield at 1.60%, just off six-week lows hit on Friday, and safe-haven German 10-year yields were down 1 basis point at -0.50%.

The German economy is beginning to see light at the end of the tunnel after the passing of the severest phase of the lockdown imposed to slow the spread of the coronavirus epidemic, Ifo’s economist said. The institute still expects a double-digit contraction of the German economy in the second quarter. ($1 = 0.9197 euros) (Reporting by Yoruk Bahceli; Editing by Susan Fenton and Ed Osmond)

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