debtRumors about ECB's plan to set limits on yields of euro area sovereign debt, which continue to circulate on Tuesday, as well as news of Germany softening its stance on Greek austerity injected some optimism into European markets which are holding onto recent gains.

According to reports by Fitch Ratings as well as the British newspaper The Daily Telegraph the ECB is indeed planning to set yield limits on Eurozone sovereign bonds, despite the fact that the central bank denied the news on Monday. The aim of such a move would be to avoid spikes in risk premiums of such countries as Spain or Italy.

The Daily Telegraph assures that Ulrich Bindseil, ECB Deputy Director General of Market Operations, will be the person responsible for the coordination of Eurozone central banks and for establishing guidelines for them.

A EU official told the British newspaper that the central banks are in contact to discuss the pros and cons of the project, although according to other sources various committees are already working on a common proposition.

Meanwhile, Fitch Ratings informed on Tuesday that the ECB could take action even without the Bundesbank's consent. The agency also said in the report that the EU crisis is heading towards a resolution and that the block will remain united. It has also stated that Italy does not need to implement further austerity measures.

German government showing some leniency toward Greece

Angela Merkel's cabinet might show some leniency regarding Greece's austerity plan, providing the country carries out all the required reforms, according to a senior CDU lawmaker.

“Small concessions are feasible provided they are strictly made within the framework of the second aid program,” the official told Bloomberg. “For instance, the interest and maturity on loans could be adjusted, as in the case of the first aid package”.

BBH analysts comment: “Despite posturing from both sides, neither Germany nor Greece will risk a Greek exit.  We believe a compromise will be seen that allows Greece to get its next tranche of aid. Separately, senior CDU official Meister said Germany won’t approve any new money for Greece, but existing aid could be brought forward.  Closure on Greece remains elusive, but risks of imminent default appear to be easing.”

Nevertheless, it is not expected that Germany agrees to a 2-year extension of the aid program, for which Greek PM Antonis Samaras will call during his upcoming meetings with French President Francois Hollande and German Chancellor Angela Merkel and on 23 and 24 August.

It was also reported on Tuesday that the package of budget cuts prepared by Greek Finance Minister Yannis Stournaras will amount to 13.5 billion euros, instead of the 11.5 billion required initially by the Troika. The austerity program is supposed to be definitively agreed upon by September 14.

Spanish borrowing costs fall at auction

Spain held a bond auction on Tuesday during which it managed to sell 4.5 billion worth of 12- and 18-month bonds, at the top of the planned range.

12-month bonds were sold at an average yield of 3.207%, compared with 3.990% the country had to pay on July 17. 18-month bonds were auctioned at an average yield of 3.45%, versus 4.35% seen at the previous auction.