The market expects the ECB to tackle the more immediate lending freeze and leave the major changes needed to the midterm. It remains to be seen which are the options the ECB presents to increase liquidity in the short term as almost all the analysts think an interest rate reduction is off the table for now.
A quarter that began with a rate hike and banks’ reliance on ECB liquidity support near its lowest since mid-2009 looks set to end with calls for a steep rate cut and the likelihood that long-term emergency bank loans will be reintroduced.
The deterioration in banks’ willingness to lend to each other stems from the spread of the crisis to Italy and the growing prospect of institutions needing to take large losses on Greek debt holdings.
Without addressing those problems, any ECB action at next Thursday’s meeting was likely to prevent a freeze in interbank lending without stimulating a return to a better-functioning money market, analysts said.
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