Papering over the cracks – for now

AFEW months ago, many market watchers were measuring the time until a full-blown disorderly Greek default with an egg timer rather than with a calendar. However, the risk of a Greek implosion – and the risk that such an event would drag the European financial system down with it – has lessened over the course of 2012.

That is, of course, not to say that fundamental Greek problems have been resolved. Or even addressed. The Hellenic Republic is now some $1.3 trillion in debt when all liabilities are taken into account and will never repay this. The country is a financial basket case and no number of summits, joint press conference and political platitudes is going to change this. Greek one-year bonds broke an eye-watering 1,000 per cent yesterday, signalling an implied six months until another default – technical or otherwise. However, such a credit event now seems to be much more manageable than it did six months ago.

Following a second long-term refinancing operation (LTRO2) last week, the European Central Bank (ECB) has demonstrated its willingness to throw its weight behind the European banking sector. The LTRO is not the same as quantitative easing and does not have the same objectives – it is not intended to increase bank lending but to ease credit contraction.

Whether or not you believe that this will make for long-term stability in Europe, it will continue to provide support for European financial equities. Witness the equities rally across European financials – even those so-called stigmatised banks which took up the funding. To go long European financials in the event of another refinancing operation – or indeed another measure from the ECB – is not a vote of confidence in the central bank’s policy, but simply a wise trade based on past events.