In the past years the LTRO programs by the ECB (in addition to little or no capital requirements) resulted in banks purchasing substantial amounts of sovereign debt (see chart). All this LTRO liquidity encouraged certain Eurozone nations to take advantage of low rates driven by demand for sovereign paper from banks. In some cases the artificially low rates allowed these nations to borrow irresponsibly (sounds familiar?)
The Eurozone leadership and the ECB have been trying to restart debt purchases by banks to keep the financing flowing. So far the 3-year LTRO facility seemed to have only a limited effect on sovereign bond purchases by EU banks, though it may have helped stem the accelerating bond sales. It remains to be seen how much impact LTRO-II (the second 3-year facility from the ECB) will have on bond purchases in the next couple of months.
|Source: Credit Suisse
Update: See this post for a superb chronology (and background) of the LTRO program.