By Nigel Davies and Jan Strupczewski
MADRID/BRUSSELS (Reuters) - Spain and France gained respite at bond auctions on Thursday highlighting a rally in euro zone government debt markets since the European Central Bank flooded banks with cheap money in December.
The European Union's top economic official forecast a deal between Greece and its private creditors by the end of the week to cut Athens' debt, despite what another aide called "ultra-difficult" negotiations with bondholders.
Dismal corporate results showed Europe's "real economy" is suffering increasingly from the currency area's sovereign debt crisis after unemployment hit a new record this week.
Madrid and Paris drew healthy demand and saw their borrowing costs tumble despite having had their credit ratings downgraded -- Spain's by two notches -- by Standard & Poor's last month, following a similar strong showing by Italy.
"We're seeing all these doubts everybody had coming into the year about what impact will the rating downgrades have on primary and secondary market performance were unfounded," rate strategist Michael Leister of DZ Bank in Frankfurt said.
The 17-nation single currency area's debt crisis weighed heavily on company results announced on Thursday, however, tipping German giant Deutsche Bank
Deutsche cut its holdings of Portuguese, Irish, Italian, Greece and Spanish bonds by 70 percent in 2011, annual results showed, partly to reduce sovereign risk but also to raise its core capital to meet tougher EU regulatory requirements.
Outgoing chief executive Josef Ackermann said private creditors were very close to a deal to reduce Greece's debt that would avert a first chaotic default in the euro area.
Olli Rehn, the EU's economic and monetary affairs commissioner, said on a visit to the Netherlands he expected such a deal by the end of this week.
Finance ministers of the euro zone will hold a special meeting next Monday February 6, aiming to wrap up the Greek package.
But Jean-Claude Juncker, chairman of euro zone finance ministers, said talks on the bond swap were "ultra-difficult.
Ackermann urged euro zone central banks to contribute to plug a funding gap for a second bailout for Athens once banks write off about 100 billion euros of Greek debt, taking roughly a 70 percent loss on the net present value of their holdings.
"A solution on Greek PSI (private sector involvement) is close. Everybody has to make a contribution," Ackermann said.
The Greek government said it had completed the bulk of talks with international lenders on a new bailout but has yet to reach agreement on issues such as wages, pensions and the recapitalization of banks.
A troika of the European Commission, the ECB and the International Monetary Fund is negotiating on conditions for a second rescue package after Athens failed to meet revenue targets or economic reform pledges in its first program.
Athens is rushing to wrap up talks with lenders on a 130-billion-euro bailout to unlock funds before big bond redemptions fall due next month. Bankers and officials have said the bailout must be finalized before a debt swap deal with private bondholders can also be announced.
The troika has demanded new measures that include lowering the minimum wage and cutting holiday bonuses.
But those demands have met resistance in Athens, where officials fear further cuts could deepen an already brutal recession and heap new burdens on long-suffering Greeks.
Government spokesman Pantelis Kapsis told MEGA television there were still three or four sticking points.
"The discussions are very tough," Kapsis said. "On the one side, there is pressure to restore the economy's competitiveness fast. We are saying that there is clearly an issue of competitiveness. On the other hand, there is also the question of recession which is very important for Greece."
With the focus in the euro zone squarely on public spending cuts and tax rises, gloomy news from three major European companies highlighted growing concern about the need for more emphasis on reviving growth.
Anglo-Swedish drugmaker AstraZeneca
Multinational consumer goods group Unilever
And domestic appliance maker Electrolux forecast tough market conditions in Europe this year as it unveiled a near 40 percent fall in annual earnings.
Chinese Prime Minister Wen Jiabao raised hopes by saying Beijing was considering greater involvement in the euro zone's rescue funds - the temporary European Financial Stability Facility (EFSF) and the upcoming European Stability Mechanism (ESM).
Wen made the comments at a joint news conference with visiting German Chancellor Angela Merkel in Beijing, but he did not made any explicit financial commitment. China has made similar positive but non-committal comments in the past.
The ESM, a 500-billion-euro permanent bailout fund that is due to become operational in July, is expected to replace the EFSF, a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.
Deutsche Bank's pretax loss of 351 million euros ($463 million) compared with a 707 million euro profit in the year-earlier quarter.
Peers such as Morgan Stanley
(Additional reporting by Leigh Thomas in Paris, Edward Taylor and Arno Scheutze in Frankfurt, Chris Wickham in London Catherine Hornby and Andreas Rinke in Beijing; Writing by Paul Taylor, editing by Peter Millership/Mike Peacock)