Calm Before the Storm?

Having successfully negotiated last week's maturity of the 1-tear LTRO, and the subsequent 6-day 'bridging' facility, the ECB may well be basking in the current slight lull in the markets' concerns over Eurozone government debt and the health of banks. The next challenge looms, in the shape of the publication of Eurozone bank stress test results, at the end of this month, and serious doubts are already creeping in as to whether a) the tests will be meaningful in construction, i.e. will they really test for appropriately extreme deterioration in the banks' sovereign bond holdings, b) will the results of the tests on the banks that are in most danger actually be published.

The final troubling issue is whether the EU authorities and the ECB have developed a detailed, watertight strategy to convince the markets, post-stress tests, that they can and will inject the required capital into banks shown to be at risk by the tests.

My judgement would be that there's a 50% chance that one or more of the 'weak links' above gives way and we find ourselves pitched back into a full-blown crisis by the time of the following ECB meeting on 2nd Sept.

Anyway, returning to this Thursday, I expect to see the Refinance Rate and the Deposit Rate kept at 1.0% and 0.25%, respectively, and no change in the ECB's sovereign bond strategy or wider attitude to Quantitative Easing. Very much a holding pattern-the calm before the storm, maybe!