Does one LTRO lead to another? Apparently not, but pressures on the European Central Bank for further credit easing have not eased.
A survey published by Bloomberg reveals that among industry insiders the belief that the ECB will return to the market remains quite strong: seventeen out of twenty-two experts highlighted some aspects of Frankfurt's recent monetary policy that could make further recourse to the market inevitable. Provided that tools other than the Ltro designed by Draghi between November 2011 and February 2012 are used.
According to Jacques Cailloux, chief economist of the Royal Bank of Scotland, “there is something wrong when you buy assets that were considered risky in November, renamed safe in January. Now we are witnessing the worst imaginable: as soon as the sovereign debt situation worsens, the banks will come back under the pressure of the markets”.
The popularity of LTRO auctions is therefore not at the highest levels and the return of tensions on sovereign bonds is exacerbating doubts in the upper echelons of European finance. If the auctions have played a key role in bringing spreads back to more sustainable levels, they may have started a vicious circle that will force the monetary authorities to return to the markets.
If the yields on peripheral bonds were to return beyond the danger level - currently 6% on ten-year bonds is considered as such - the banks, stuffed with those bonds, would be even more exposed to sovereign risk than a few months ago, and their ability to finance the private sector would be even more limited.
A study by Deutsche Bank, however, highlights an important aspect: the liquidity available to the banks is sufficient to satisfy the state needs of the European region. The extraordinary interventions of the ECB have therefore played a fundamental role in bridging the liquidity gap, but it will be necessary that the next credit easing measures are brought under the umbrella of the Securities Market Programme, which has the advantage of not leaving "carte blanche" to credit institutions in exercising the carry trade on bonds, with only one purpose: to enrich their balance sheets, often in a short-term perspective, to the detriment of the normal flow of liquidity on the interbank market.
The return of the ECB to the markets is now taken for granted, especially after the utterances of central banker Benoit Coeure, who yesterday recalled how the securities market program has not been used in recent weeks, but remains "still available".
