ECB loan facility is "no silver bullet" The dark days of December may be over, but as the expected ratings downgrades by Standard & Poor's of France and Austria show, uncertainty driven by the eurozone crisis still hangs over markets. The hope will be that the latest piece of bad news does not unstick Europe's attempt to resolve issues in the region's banking sector, which at the end of last year was facing a serious challenge as investors backed away from fund raisings and liquidity dried up. European banks still need to refinance about €700bn of debt this year, with a sizeable portion of that due in the first quarter. So when the European Central Bank took the unprecedented step in December of offering a three-year loan facility at highly favourable rates and bids came in totalling €489bn from 523 banks across Europe, the move was greeted with cautious optimism. But three weeks after the launch of its longer-term refinancing operations (LTRO) - and with another programme due in February - is the ECB's "big bazooka" having any meaningful impact on bank funding? Mario Draghi, ECB president, was this week clear that by pumping cash into the financial system, Europe had averted a credit crunch that would hav had far-reaching implications for the region. Bankers concur. "Twelve months ago no one thought that the ECB would play such a central role," says David Marks, chairman of financial institutions debt capital markets at JPMorgan Chase in London. But "now the market realises that this is a game changer," he says. Market indicators echo this. Yields at Spanish and Italian government bond auctions this week were sharply lower than in comparable previous sales. And three-month dollar Libor rates have fallen since the start of the year, as have 10-year euro swap rates, a good indicator of the level of fear in the market. There has also been a steady flow of new issues among northern European banks. About €27bn in covered bonds, a type of debt considered ultra-safe by investors, has been sold since the start of the year, according to Dealogic. Significantly, there have even been deals in the senior unsecured debt market, a mainstay of bank funding that fell out of favour in the second half of 2011 as investors turned to what they perceived to be safer funding options. Mark Geller, head of the financial institutions syndicate at Barclays Capital in London, says the LTRO has been crucial in providing banks with access to a huge source of funding, which has helped to raise confidence in the senior unsecured markets. For investors, the facility has removed the worry of an overhang of supply given material bank redemptions in early 2012. "There are parallels with the delicate recovery of the markets in 2008 and 2009" when government backed guarantee schemes helped banks get back to market and funding actively, he says. Yet, despite the January upsurge, some quietly admit they expect only sporadic pockets of debt issuance by banks as sentiment remains fragile. James Longsdon, co-head of European financial institutions at Fitch, says the ECB's €489bn facility was highly significant in the short term but "it is not a silver bullet . . . It buys banks time to address near-term funding risks. He adds that secured debt funding and running down parts of loan books will be part of the solution, but that banks are also preparing for asset sales to free up their balance sheets. Private placements, which are less transparent and harder to track, also remain a key part of the funding equation. Analysts also point out that while there was strong take-up for the ECB's programme, overnight deposits at the ECB hit a record €490bn on Thursday, in spite of the fact that the bank pays just 0.25 per cent interest for overnight deposits, below the rate at which banks could lend on the interbank markets. Mr Draghi says banks that borrowed from the ECB are "not the same" as those depositing with the bank. The high level of deposits at the ECB does suggest continued caution by banks, however. Translating the ECB's liquidity shot into money that works for Europe is the next step. What the eurozone needs is for the LTRO money to trickle down to corporates and sovereign debt. Divyang Shah, global strategist at IFR, says that while the recent rally in peripheral debt is welcome, it must be set in context. Investors still have concerns about the ability of governments to meet fiscal targets, sovereign ratings downgrades, default risks and the solvency of banks. "ECB liquidity has only allowed us to step away from more extreme and immediate scenarios which were being priced into sovereign and financial risk," he says. In short, the ECB's bazooka and the promise of another in February, has bought banks valuable time. But it will not solve the fundamental structural problems in the eurozone. As one investor puts it, the euro may "muddle through" but that does not mean the markets will stay quiet.