Following the decline in risk premia and increased demand for government bonds the ECB has scarcely been compelled to make support purchases via the SMP scheme since the first LTRO. The expansion of refinancing operations could thus be regarded as a substitute for direct intervention in the market and as indirect deficit financing via the ECB. One important difference, though, is that the risks attached to government bond purchases are not borne by the ECB but by the commercial banks. It is probably also no coincidence that the ECB only decided to expand its refinancing operations after far-reaching resolutions were approved at the EU summit in early December.

In taking this step the ECB kills two birds with one stone: firstly, it ensures the supply of liquidity to the banks; secondly it brings about stabilisation of the situation in bond markets without increasing its direct exposure to sovereigns. The ECB is thereby also sending a signal to the politicians. It is prepared to continue supporting the political process in Europe, as long as tangible progress is being made. Now, however, it is up to governments to bring about further stabilisation and to use the time they have bought to implement the necessary structural reforms and consolidation of government finances.

Eoin Treacy's view Opinion is divided on the ramifications of Greece's debt restructuring. Some suggest it represents the thin end of the wedge and that it is only a matter of time before Portugal's stubbornly high borrowing costs become a front page news item. Spain's unilateral announcement that it will post a higher than expected deficit is currently occupying that position. The bears may yet be correct. The ability of various Eurozone countries to sustain their respective austerity programs into the medium term remains an open question. Let's examine some of the relevant spreads to ascertain how perceptions are currently skewed.

The Eurozone's version of the TED spread (3-month Euro Libor – Generic 3-month German government rates) has been contracting since December. It hit a new reaction low today and a break in the progression of lower rally highs would be required to begin to question the positive effect of the ECB's lending program on the banking sector.

Greek 10-year spreads over Bunds halved with the imposition of the restructuring plan last week. At 1700 basis points, the spread is still wider than that of any other Eurozone country. It will need to continue to narrow in order to bolster confidence that the bailout has succeeded in its objective of putting Greek debt on a sustainable trajectory.

Portuguese spreads remain uncomfortably high at close to 1200 basis points. A break in the progression of higher reaction lows, currently near 1000 basis points, will be needed to confirm a medium-term peak.

Irish spreads have been stable throughout the last few months, not least because the Irish government does not need to access the capital markets until at least the latter half of this year.

Spanish spreads pulled back sharply from the November peak above 400 basis points and have at least stabilised above 300. An additional decline below that level will be needed to suggest improving confidence in the ability of the Spanish government to meet its obligations.

Italian spreads have also pulled back to 300 basis points but from a peak of over 500 basis points. Italy has to be seen to deliver on reforms if potential for widening spreads is to be contained.

Belgian spreads have contracted sharply over the last few months. French spreads have stabilised near 100 basis points but will need to contract further to bolster confidence. Austrian spreads have a similar pattern.

At present Dutch spreads are the only ones that are moving significantly higher, but from low levels.

These spreads highlight the fact that the ECB's intervention was primarily about lending assistance to the banking sector. Eurozone governments have benefitted from the increased liquidity associated with this initiative but will need to continue to hold to their respective austerity commitments if they are to curry favour with the bond markets. Our belief for a number of years has been that there is no medium-term prospect of spreads returning to their pre-crisis narrows. The challenge remains doing enough to bolster confidence.