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The likelihood southern European banks will require a third round of emergency three-year loans from the European Central Bank is increasing as Greece’s debt crisis worsens, Fitch Ratings said.
“If a third Longer Term Refinancing Operation is needed, we believe it will be provided,” James Longsdon, a managing director at Fitch’s financial institutions group in London, wrote in a report today. The timing is “unlikely to be imminent without a further significant shock, such as a Greek exit from the euro.”
The Frankfurt-based ECB began the LTRO after bank funding markets froze and yields on southern European government debt hit euro-era records last year. Lenders in the region borrowed 489 billion euros ($623 billion) in December and a further 530 billion euros in February, according to the central bank.
The move initially helped boost bank stocks and ease concern about lenders’ creditworthiness. The 43-member Bloomberg Europe Banks and Financial Services Index rallied as much as 23 percent from the announcement of the LTRO on Dec. 8 to March 19. The benchmark has since erased that gain. Similarly, the Markit iTraxx Financial Index, which measures the cost of insuring the senior debt of 25 European banks against default, fell to a low of 181.472 in March, before increasing to 308.398 on May 18, the highest since Dec. 19.
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