The ECB has pulled out all the stops

In December it decided to ease collateral requirements again and to provide 3-year loans to banks in two separate auctions. A reduction from 2% to 1% in the reserve requirement ratio for banks was aimed at improving access to the Eurosystem liquidity facilities, notably in the periphery. The council also cut its refi rate by 25bp to 1%. The first 3year LTRO on 21^st December had a whopping uptake of E489bn, this was deemed a success, although it is said that banks aren’t purchasing sovereign debt but using the money to re-finance their own bonds. The operation has added some E200bn to overall liquidity. However it is argued that liquidity measures do not solve the debt crisis, only soothe its consequences. It is expected that the hurdle to another rate cut to be significant, as the depo rate already stands at 0.25% and this is the most relevant rate in the view of the excess liquidity in the market. A further cut in the refi rate should not be ruled out should the euro zone slip into deep contraction or deflation. Although the threshold to large scale QE appears to be even higher, market developments in coming weeks may well underline the necessity to re-accelerate bond purchases by the Eurosystem, particularly if the euro zone leaders fail to come up with tangible solutions.