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Is the liquidity crisis over in Europe?

You would be mistaken for believing that the banking liquidity crisis has come to an end in Europe judging by the bounce in banking share prices yesterday. However, despite the fact that immediate ECB loans were significantly lower than had been feared there is still relatively low liquidity in the traditional money markets and interbank lending is nowhere near as fluid as it should be. So what can we expect in the future?

The European banking system is the key to recovery across Europe and the ECB is well aware of this. However, the decision to terminate the ECB emergency liquidity program has left a potential shortfall in the hundreds of billions of euros. At some stage more banks will need to step forward to refinance their borrowings and improve their liquidity at which point we could see further pressure on the European banking system. As soon as any concerns appear in the marketplace we will see the cost of borrowing spike upwards which can in itself cause more problems and a vicious circle of concern and investment stagnation.

So those who are calling an end to the European banking crisis may well need to think again because we are nowhere near out of the woods!

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