* Belgium yields 14bp below France despite lower rating
* Downgrade by Fitch is not convincing, says strategist
* Italy may need to put in 6.5 bln euro to rescue BMPS
* Greece debt relief talks to resume -eurogroup head
(Adds German Schatz quote, updates prices)
By Abhinav Ramnarayan
LONDON, Dec 27 Belgian bonds on Tuesday
weathered an unexpected rating downgrade, highlighting a
divergence between how the market and some credit agencies view
the country's debt profile.
Italian bonds lagged, however, with the 10-year yield rising
4 bps to 1.85 percent by 1500 GMT, after three sources close to
the matter told Reuters the government in Rome was likely to
have to put in around 6.5 billion euros ($6.79 billion) to
rescue troubled bank Monte dei Paschi di Siena.
An auction scheduled for Thursday also put pressure on
Fitch cut Belgium's rating by one notch to AA- on Friday
evening, citing its relatively high debt and upward revisions to
fiscal deficit targets.
DZ Bank strategist Daniel Lenz said he was "not at all
convinced" by the notion of cutting Belgium by one notch while
keeping France unchanged "even though (it) faces similar
Fitch earlier this month maintained France's rating at AA
with a stable outlook.
Lenz cited Belgium's "better unemployment figures, better
current account deficit and upcoming elections in France" as all
reasons why he believes Belgium should be rated at least on a
par with France.
Belgium's debt to GDP ratio is however higher at 105.8
percent compared to France's 96.20 percent, as of 2015,
according to Reuters data.
With Fitch's downgrade, France is rated a notch higher than
Belgium by three of the four main credit agencies.
However, Belgium's borrowing costs remain lower than those
of its neighbour.
At 1500 GMT on Tuesday the yield on Belgium's 10-year
government bond fell 3 basis points to 0.53 percent, 14 basis
points below the French equivalent, which also fell 3 bps to
Most higher-rated government bond yields fell 2-3 bps on the
day, with the yield on two-year German government bonds, or
"Schatz", dropping 2 bps to a record low of 0.82 percent.
Schatz have rallied strongly in recent months with investors
struggling with a shortage of short-dated bonds that are used as
collateral to borrow in money markets.
The effect has intensified since the European Central Bank
made tweaks to its bond-buying scheme that are likely to focus
purchases on the short end of the government bond market.
Two-year Greek government bond yields - which are not
eligible for ECB purchases - traded at 7.86 percent, close to
recent highs, as investors reacted cautiously to comments from
Eurogroup chief Jeroen Dijsselbloem that talks about initial
debt relief measures for Athens would resume.
Debt relief was frozen mid-month over Greece's decision to
pay pensioners a Christmas bonus.
"I think overall this is positive news for the Greek
government, and it will be eventually reflected in markets.
Trading is thin at the moment so it is hard to read too much
into it," said Lenz.
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Reporting by Abhinav Ramnarayan; Editing by Alison Williams)