LTRO could bring the Eurozone crisis under control

The ECB’s long-term refinancing operations (LTRO) has helped target support “where it is most needed”, into weak banks in weak economies, says Skandia Investment Group chief investment officer James Millard. But the group still favours emerging markets.

Millard said: “Under the LTRO, European banks could borrow from the ECB in unlimited size (against eligible collateral) for three years at a very low rate of interest. As a result of this, banks (especially the weaker banks in the weaker economies) are now probably fully funded for two years or longer.

“The liquidity supplied to European banks via the European Central Bank’s €1tr long-term refinancing operation erased fears that weak banks would be unable to fund themselves, while also boosting demand for peripheral government bonds. The programme could be the big bazooka the market was hoping for.

“When the debt crisis is reviewed by economic historians in years to come, the LTRO could be seen as the event that starts to bring the crisis under control.”

Despite optimism on the effects of the LTRO, Skandia continues to favour emerging markets. Millard said: “Economic data in many emerging economies has stabilised with signs emerging that it could pick up in the months to come. Fears of a hard landing (especially in China) are likely to recede further with this and low interest rates likely to support these markets.”

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