Fitch Survey of European Investors Points to LTRO3

A recent survey of European investors conducted by Fitch ratings points to a growing need for a new round of Longer-Term Refinancing Operations (LTROs), which entail cheap financing for private banks from the European Central Bank. The quarterly survey of investors shows that 53 percent of respondents believe that credit conditions will worsen in the third quarter, an all-time high, rising from 45 percent in the second quarter.

European investors have worried over the last few months about the financial stability of Spain and Italy. Spain has already accepted a $125 billion bailout to recapitalize its ailing banks and Italy has debt-to-GDP levels north of 100 percent. This is evidenced by 60 percent of respondents indicating that sovereign stresses continue to be the source of most concerns of investors. This percentage has increased since late 2011 when the first two rounds of LTRO's were announced and 49 percent of investors were most concerned about bank funding stresses.

Even though banks are not the main source of stress according to the survey, 82 percent of investors believe that banks will need another LTRO within two years. Within those 82 percent of investors, 33 percent indicated that another round will occur within the next year. Most believe that further LTRO's won't happen until the current ones begin to wind down in late 2013 and early 2014. Fitch is of the same opinion.

"We don't project that another LTRO will be needed this year but many banks in southern Europe have become dependent on ECB facilities as their only real source of wholesale funding," said Fitch in a statement. "If they are unable to de-lever in time, they will likely need some assistance to be able to pay back their LTRO take up."

Further funding for banks would likely help sovereign bonds, as it did in early 2012, but those effects were largely transient and may also be again. In tandem with other measures, such as deposit insurance, expansion of the joint bailout funds, and bond purchases by the bailout funds and the ECB, a grand plan to save the euro may slowly be shaping.