Analysts in the City of London have returned from the Easter break entertaining the possibility that the European Central Bank will need to initiate a fresh round of cheap, three-year financing to stabilise the region, as flagged up by Financial News earlier this month.
Bankers said that they were preparing for a further ECB intervention following previous refinancing operations in December and February. PJ Bye, head of public sector debt syndication at HSBC, said at the time: "I don't see how the authorities are going to go from two €500 billion LTROs to nothing".
This was a controversial suggestion for others, who believed there was still plenty of money in the system to support the sovereign debt markets in Europe's troubled economies. However, following the disappointing performance of Spain‘s latest 10-year bond auction last week, analysts believe it is now a question of when, and not if, further action will be taken in Europe. Analysts at Société Générale this week predicted a "long and hard grind" for Spain, and said in a research note: "The ECB could offer a new liquidity boost via LTRO 3, but we believe this would come only if financial stress intensifies significantly".
Deutsche Bank’s Jim Reid believes the ECB is unlikely to act quickly, given indications last week that it attributes the recent spike in Spanish debt to “sluggishness in the pace of reforms”. He concluded: “If Europe does need further intervention it is likely to get far worse again first.”
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