Thoughts from Europe . ECB : friend or foe?

The market reacted with extreme severity to the remarks of Mr. Braghi at the ECB press conference. The actions of the Governing Council were far-reaching in their support of the Europeanbanks: A rate cut, a loosening of collateral requirement and more importantly a 3 year refinancing facility. This should give European banks the incentive to buy EU debt which can be used as collateral to borrow funds at lower rates from the ECB. The US money center banks have done well thanks to a similar Fedpolicy. It kicks the can down the road, but allows for some balance sheet repair. If this is correct, EU banks are good for a trade.

The ECB is well aware that at some point they will have to monetize, or, there will be no EURO anymore. If their fundamental role is to insure price stability, then this policy is applicable in case of inflation as well as deflation. A demise of the EURO would create major price instability.

The ECB does not want to give national politicians the leeway to avoid reforms. It is going to be a very fine line that is being played and it will take time.

Regarding the injections of funds in the IMF and the earlier establishment of the ESM, clearly we are touching some delicate political questions. Democracies do not work too well when themajority of the electorate benefits from subventions that should be cut. They oblige the ruling party to ally themselves to extremes, whose demands are bynature, counter-productive. The Dutch, as early as Friday afternoon, were confronted with this painful reality. But at least a commitment to provide liquidity is there.

None of the above solves any problems, but it gives us some breathing space.
I would hope for some positive market reaction until the end of the year.