ROME, Aug 8, 2011 (AFP) - European Central Bank action to buy Italian and Spanish bonds, and promises of further budget cuts in Rome and Madrid, held stocks broadly stable on Monday but financial markets remained highly volatile.
The ECB's shot in the arm had initially sparked a rally on both the Madrid and Milan stock exchanges but the effects petered out within hours as broader fears over the escalating eurozone debt crisis and global growth weighed in.
The benchmark FTSE Mib index in Milan was down 0.79 percent at 1030 GMT. The IBEX-35 index in Madrid was falling 0.31 percent at the same time.
"The seesaw continues," said the website of Italian daily Corriere della Sera.
Italian financial website firstonline.info defined Monday as "a day of shivers" for stocks but said there was "a bit of light" after the panic selling seen last week as borrowing rates came down from record levels hit earlier.
ECB intervention "has led to a very big reduction in the debt spreads for both economies," said Nuria Alvarez, analyst at Spanish brokerage Renta4.
Umberto Bossi, a key coalition partner in Prime Minister Silvio Berlusconi's centre-right coalition, said: "The ECB is doing the right thing."
After Berlusconi had promised on Friday to speed up cuts to balance Italy's budget by 2013 instead of 2014, Bossi had said: "By returning to budget balance one year early, the ECB has guaranteed that from Monday it will buy our bonds."
Spanish Finance Minister Elena Salgado has also promised extra effort -- savings of 2.5 billion euros this year through tax changes for large corporations and a further 2.4 billion euros ($3.6 billion) through the purchase of cheaper generic drugs.
"We see any step that can help comply with the deficit goals as positive especially after the ECB pushed Spain and Italy to accelerate measures to comply with their fiscal commitments," Renta4's Alvarez said.
Spain has launched reforms to strengthen bank balance sheets, cut spending, raise the retirement age, open up the labour market and sell off assets.
But Spain's faltering economy, with an unemployment rate of 20.89 percent, slowed in the second quarter, complicating its efforts to cut the deficit.
Italy's growth rate accelerated from 0.1 percent in the first three months of the year but clocked a still sickly 0.3 percent in the second quarter.
Corriere della Sera meanwhile revealed the contents of a letter to Berlusconi from ECB chief Jean-Claude Trichet and Italian central bank governor Mario Draghi spelling out the measures the government should take.
The priorities identified in the letter were the privatisation of municipal services and an overhaul of labour laws to allow easier hiring and firing.
It also called for liberalisation reforms to be passed by government decree to speed up their approval, the report said.
Analysts said that having ignored the crisis for too long, the Italian government was effectively under "external administration."
Guido Compagna, a commentator for financial website firstonline.info, said France and Germany were now dictating Italy's economic policy.
"Silvio Berlusconi accepts this de facto external administration albeit reluctantly since he sees it as the only chance for his government to last if possible until the end of its mandate" in 2013, he said.
Italian lawmakers have been called back from summer recess this week to adapt the constitution to enforce balanced budgets and to enact labour market reforms.
"Italy always needs to see the edge of the abyss to start doing something," said Carlo Maria Pinardi, an economics professor at Bocconi University in Milan.
"The government's current weakness has definitely contributed to economic and financial deterioration, requiring stronger external pressure," he said.
Tito Boeri, an independent economist, said: "Italy has distinguished itself with a total absence of initiatives these past few weeks and an underestimation of the crisis. European pressures were necessary."
The government has said it will speed up implementation of the 48-billion-euro ($69-billion) austerity cuts approved by parliament last month despite opposition from the centre-left which says Italy's poorest will be hit hardest.
Italy's budget deficit was at 4.6 percent of Gross Domestic Product (GDP) last year but its total public debt level is still one of the highest in the world and the economy's anaemic growth rate has spooked investors.
Spain is aiming to cut its public deficit from 9.2 percent of GDP last year to 6.0 percent in 2011 and 4.0 percent in 2012 and then to 3.0 percent -- the EU ceiling -- in 2013.