Bonds Show Return of Crisis Once ECB Loans Expire
Jan. 20, 2012, 11:58 a.m. GMT
[BLOOMBERG, by Paul Dobson, Emma Charlton and Lucy Meakin]'European Central Bank President Mario Draghi’s unlimited three-year loans to euro-region banks may give Italy and Spain only temporary respite from the region’s debt crisis.
Two-year Italian and Spanish notes rallied since the ECB said Dec. 8 that it planned to offer as much liquidity as banks wanted in exchange for eligible collateral. The gain on the short end of the market outpaced longer-dated debt on concern the nations’ austerity plans won’t plug deficits and reduce Europe’s largest debt load. Yields on Italian two-year notes fell to the least relative to 10-year bonds in 21 months.
“This is about buying time,” said John Davies, a fixed- income strategist at WestLB AG in London. “It’s only when the market believes Italy and Spain have returned to sustainable debt levels that you can say the crisis has truly ended.”
Investor demand at sales of government bills and short-term debt has increased across the euro region since the ECB injected 489 billion euros ($632 billion) of three-year loans into the financial system on Dec. 21. The loans were offered at the benchmark rate, currently 1 percent, enabling financial institutions to profit by lending the cash at higher rates, including to governments. The banks that borrowed the cash may also use the funds to finance their own maturing debt.
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