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Funding Squeeze May Haunt Europe Again: Strategist
CNBC.com | April 10, 2012 | 02:37 AM EDT

Key indicators are showing heightened risk of another "funding squeeze" in Europe despite action by the central bank to pump more than 1 trillion euros of cheap loans into the region's lenders through its longer-term refinancing operation, Patrick Perret-Green, head of FX & rates strategy for Asia at Citi told CNBC on Tuesday.

The EURO STOXX Banks Index has fallen 19 percent from February's highs, Perret-Green noted, while a proxy for the cost of inter-bank borrowing, the three-month Libor-OIS spread, was at risk of widening.

Although the banks index is looking oversold from a technical perspective on the daily charts, Perret-Green said the weekly chart looks "dire." Such indicators point to "a growing risk of another funding squeeze, irrespective of what the central banks may try to do."

Spanish bond yields and credit default swaps are also showing signs of stress with borrowing costs for benchmark Spanish government debt jumping to five-month highs as the "euphoria" generated by the LTRO wears off, Perret-Green said.

The country's apparent inability to control its fiscal deficit - which was 2.5 percentage points higher than its target last year - and its decision to raise this year's target shortfall to 5.3 per cent, from 4.4 per cent, has unnerved investors, Reuters Breakingviews reported on Monday.

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