Investors eye further ECB intervention

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Investors are increasingly betting on further intervention by the European Central Bank to calm markets as the sugar rush from a €1tn-plus capital injection in to the eurozone financial system wears off and fears grow over the outlook for Greece and Spain.

A report from Bank of America Merrill Lynch finds that 60 per cent of fund managers believe the ECB will engage in direct, large-scale quantitative easing to stem the euro crisis by the end of this year.

The findings come as markets across Europe are under heavy pressure amid fears that political deadlock in Greece could lead to its exit from the eurozone.

During the past week the benchmark Athens General index has flirted with 20-year lows, while Spain’s Ibex 35 index has hovered around a nine-year low.

Didier Saint-Georges, a director at French fund manager Carmignac Gestion, said he thought the eurozone would continue to muddle through with the help of policy intervention.

“Clearly our sentiment is that yes, certainly the ECB ultimately will have to intervene again, and yes, the negotiations will have to take place between surplus and deficit countries. But there will be very tough limitations, and decisions will be difficult to reach with periods of tension in between,” Mr Saint-Georges said.

Meanwhile, a separate report from the Fitch rating agency finds that 38 per cent of European investors think the ECB will be forced to offer eurozone banks three-year loans under its longer-term refinancing operations.

James Longsdon, co-head of the European financial institutions group at Fitch, said that, while a third LTRO did not appear imminent, a growing number of investors were clearly concerned that some eurozone banks would not be able to deleverage sufficiently by the time the second LTRO needed to be repaid.

Worries at the end of last year that banks could run out of money to refinance maturing debt and to fund themselves prompted the ECB to move to assist banks. Hundreds of lenders borrowed more than €1tn from the ECB at a rate of just 1 per cent.

The December and February LTROs removed immediate funding pressures and also reopened wholesale funding markets, providing a short window of opportunity for some banks to tap private investors.

Many banks now report that they have prefunded for this year, using either cheap LTRO funds or money raised in the public markets.

Neil Williamson, head of Emea credit research at Aberdeen Asset Management, said that, despite nervousness in markets, the ECB was unlikely to step back in with a third LTRO so soon after the first two because banks were still awash with liquidity.

“Having said that, if we started to see increased deposit flight from the periphery or if the ECB felt that it was the most efficient, or indeed the only, way it was willing to bring down peripheral yields, then it might step in with another LTRO sooner,” Mr Williamson said.

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