Investors to ECB: 1 trillion euros is not enough

As renewed worries about government debt roil financial markets, investors are looking to ECB president Mario Draghi for more support.

WASHINGTON (CNNMoney) -- The European Central Bank has pulled out all the stops over the past few months to prevent a credit crunch by providing banks with €1 trillion in ultra-low cost financing.

That €1 trillion move, which was hailed as a game changer, helped ease pressure on eurozone nations as some banks used the money to buy government bonds.

But the potency of the ECB's two long-term refinancing operations, or LTROs, appears to be fading as yields on Spanish and Italian bonds have shot higher in recent weeks.

ECB president Mario Draghi has said the goal is to support the economy by helping banks that have been struggling to fund themselves amid concerns about exposure to sovereign debt. He has called on eurozone officials to take advantage of improved market conditions to push ahead with fiscal consolidation and structural reforms aimed at increasing economic competitiveness.

Still, the renewed tensions have raised speculation that the ECB could resume its controversial purchases of government bonds.

Robert Zoellick, the outgoing president of the World Bank, said Thursday that the ECB's "extraordinary actions" were appropriate, although he suggested that more may need to be done.

"We are now in a phase where, after the ECB provided very attractive financial resources to a number of the banks to be able to buy government debt...they are about at the end of that point and limit, so I think further actions are going to be called for," said Zoellick.

Investors have been particularly worried about Spain, which is struggling with painfully high unemployment and ongoing problems in the banking sector. The government has announced a €27 billion austerity program, but investors are concerned the nation may not achieve its fiscal targets this year.

Despite those worries, Spain successfully sold €2.5 billion worth of long-term bonds and bills Thursday, although yields moved higher following the auction.

The results suggest that investors are betting the ECB is willing to intervene in the bond market, said Karl Schamotta, senior market strategist at Western Union Business Solutions in Toronto.

In addition, he said investors have been encouraged by signs that global finance officials will announce new financial resources for the International Monetary Fund during the IMF and World Bank's spring meeting this week in Washington, D.C.

"Yields are becoming more attractive in an environment where institutions are demonstrating an increasing willingness to intervene, and are also accumulating the financial firepower necessary to do so," said Schamotta. "No trader wants to play chicken with elephants this large - particularly in the event that they get bigger this weekend."

Beyond that, the Spanish economy has shown some signs of improvement, with exports outpacing imports and labor costs declining. And the new government in Madrid has outlined an "impressive" set of structural reforms to deal with its longer-term economic challenges, notes James Nixon, an economist at Societe Generale.

"Spain is undertaking exactly the sort of adjustments that a country needs to remain within a currency union," Nixon wrote in a report. "And yet the relief generated by the ECB's LTRO has quickly evaporated in the face of renewed concerns about global growth and the size of the Spanish government deficit."

Nixon said the ECB is not likely to resume buying bonds anytime soon, since the bank under Draghi has shifted its focus toward programs like the LTRO. At the same time, he said intervening in the bond market on Spain's behalf could create a "moral hazard."

"The ECB may prove to be very reluctant to step in even if Spain can justifiably argue it is pursuing the necessary reforms," he said. "The ECB will be concerned that, once started, sustained intervention to support Spanish bond auctions will be hard to avoid."

The bigger issue, many experts say, is that the ECB cannot do much to fix the problems at the center of the euro crisis. It can help create the conditions for governments to enact reforms, but the bank cannot directly influence national policies.

"I don't think the LTROs really address the fundamental problem and only bought time," said Natascha Gewaltig, chief European economist at Action Economics. "The realization that the ECB cannot save the day is what is coming up now."

Gewaltig said investors have also been rattled by concerns that Spain may need to nationalize some banks. In addition, she said the lack of a "joint strategy and growth concerns" have stoked worries about the European Union's focus on austerity.

While these issues are not new, the latest round of jitters suggests that confidence in global financial markets remains low and investors are primed to react strongly to relatively benign news.

"The problem we have seen over and over in the debt crisis is that even if concerns are overblown, they turn into a self-fulfilling prophecy," said Gewaltig. "Still, there clearly are still risks, and the uncertainty about the strategy in Europe is also not helping."