3:00 PM Frankfurt – The European indexes gained more than 1% and Spanish debt was downgraded to near junk level. Italian three-year bond yields rise in auction. German consumer prices climbed in September and Greek jobless rate rose to a new record in July.

European indexes edged higher as the markets in the region overlooked the latest downgrade of Spanish debt just above junk level. Italy sold €3.75 billion of three-year debt at higher yields.

Inflation in the euro area was mixed but Greek jobless rate rose to record levels and Swedish crown fell to a 3-month low after the latest read on inflation was below expectations and raised the prospect of a rate cut.

Spanish Ratings Cut

Standard & Poor''s lowered Spain''s long-term credit rating by two notches to ""BBB-"" from ""BBB+"" with a negative outlook, just above the junk level.

The agency said that the deepening economic recession is limiting the Spanish government''s policy options and rising unemployment and spending constraints are likely to intensify social discontent and contribute to friction between central and regional governments.

The International Monetary Fund Managing Director Christine Lagarde said in Tokyo that Greece needs another two more years to meet its budget targets.

The euro rebounded to $1.292 after Lagarde’ view on heavily indebted nations and her willingness to offer more time to meet the lender’s demand also removed some of the tail risk on the euro.

Separately, German Finance Minister Wolfgang Schaeuble said in Tokyo that the decision on extending the debt repayment schedule for Greece will be taken only after the troika assessment report but he reiterated that the euro area will not bear the burden of Greece’s debt.

In Paris trading, the CAC-40 Index gained 31.94 or 1% to 3,397.81 and in Frankfurt the DAX Index edged higher 77.78 or 1.1% to 7,282.84.

The yields on Spain’s benchmark 10-year climbed 10 basis points to 5.86%. Italian 10-year yields fell 4 basis points to 5.07%.

Italian Bond Auction

The Italian Treasury sold €3.75 billion of its three-year benchmark BTPs at an average yield of 2.86% compared to an average yield of 2.75% at the prior auction on September 13. The bid-to-cover ratio rose to 1.67 from 1.49 last month.

The country also raised €2.25 billion from the issue of bonds maturing in 2016, 2018 and 2025. The average yield on 2016 bonds was at 3.42% and that on 2018 bonds was at 4.06% whereas for the 2025 bonds, the average yield was 5.24%.

German, French, Spanish Inflation

Germany''s consumer price index rose 2% annually in September, unchanged from the preliminary estimates, final data released by the Federal Statistics Office showed.

Compared with August, the consumer price index remained unchanged in September confirming the flash estimates.

Separately, the French consumer price index declined 0.3% in September compared to a 0.7% rise in August. Annually, the consumer price index eased to 1.9%in September from 2.1% in August.

In another report, Spain''s consumer prices soared in September on an increase in sales tax, final data from statistics office INE showed.

The consumer price inflation climbed to 3.4% in September from 2.7% in August. The rate was initially estimated to rise to 3.5%.