The coordinated move by the world’s leading central banks has lifted the prices of risky assets with European banking stocks seeing a sharp bounce. While the new ECB liquidity provisions look to raise market sentiment in the short run one must ask what the world’s central bankers expect down the road? The last time these parties worked in tandem was three years ago in the fallout of the Lehman Brothers default. With today and tomorrow’s Ecofin meeting occurring just after the new policy move and an increase in chatter from European officials that entertain the possibility of a Greek default, could the ECB be preparing the European financial system for a Greek credit event?
Comments coming from the Sarkozy/Merkel/Papandreou conference call initially helped to support market sentiment though the wording was noticeably less firm and opens the door for additional interpretations as often occurs when following carefully crafted political speeches and government press releases. Given Wednesday’s statement, “France, Germany are convinced Greece’s future is in the euro zone,” it is noticeable that the wording is less concrete than previous statements that deny any possibility to exit the EMU. Given the two day Ecofin meeting that includes special guests US Treasury Secretary Timothy Geithner and the #2 at the IMF it may be fair to assume that a Greek default is on the agenda of the meeting.
Additional liquidity provisions may be a way for the ECB to begin to cushion the European financial system from the pressures it might face from a potential Greek haircut or default should the Troika not approve the next tranche of aid. With the divisions between the ECB and Germany growing, the new unlimited 3-month liquidity provisions may be considered a preemptive strike. This once again brings headline risk back into play over the weekend with the EUR having the largest risk of an opening gap lower, much like we saw at the beginning of this week.
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By Russell Glaser
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.