European Central Bank’s announcement that it will extend liquidity provisions to European banks has been received for moment as saving grace in the ongoing sovereign debt crisis. However, is it solution? From the outset, it has not been so much about Greece but rather the EU banks particularly French and German holding Greek sovereign debt. (See ARTICLE – “Death of the Euro?” - diplomaticallyincorrect.org/films/blog_post/death-of-the-euro-by-ambassador-mo/29753 ). A default by Greece would cause losses perhaps beyond capital and liquidity capacity of such banks and could initiate contagion – a domino effect of loss of liquidity and confidence. The European and potential global financial system could seize-up, ala Lehman Brothers 3 years earlier. Such concerns/fears may or may not be real. Further, in the current predatory environment, speculation could turn to speculative predation. The ECB took steps much like US Fed 3 years earlier to both provide liquidity and stem predatory speculation. However, 2 problems: This does not yet fix the structural problems within the Eurozone. It may be necessary for Greece and perhaps a couple of the other smaller PIIGS to leave the Eurozone for health of the Euro and the ability to recover more quickly. More interesting is the question of who really stands behind the ECB liquidity guarantee and will it suck down the credit quality/ratings of other member states/central banks of the Eurozone? It is understood that Germany carries the bulk of the burden. However, even assuming the political will of German voters, the capacity of other Eurozone partners to bear a share of the burden, at some point such guarantees/liquidity provisions may have cumulative effect of eroding credit standing/ratings. It is a similar consideration borne by US and US Federal Reserve Bank system in last few years (through TARP and such similar provisions effected in response to 2008 financial crisis). A rating agency downgrade may not be imminent. The US political discord surprisingly has been even greater than that witnessed within and between Eurozone partners. That was probably the decisive factor for the S&P downgrade. However, the rating agencies are already on alert and weary on level of institutions and states. The ECB will be scrutinized – is it only as strong as the weakest link or does it represent some cumulative strength? Most importantly, from a political and financial perspective, the most difficult transformation is ahead of the Eurozone – the structural changes. And, it is not likely to be a quick process, nor without pain and controversy. ARTICLE – (10-3-2011) –“Vicious Cycle & Contagion…” - diplomaticallyincorrect.org/films/blog_post/vicious-cycle-contagion-in-practice-greece-blames-recession-for-not-meeting-deficit-targets-by-ambassador-mo/35721 FILM REPORT – “Global Financial Instability Persists” - diplomaticallyincorrect.org/films/movie/global-financial-instability-persists/28644 By Ambassador Muhamed Sacirbey Facebook – Become a Fan at “Diplomatically Incorrect” Twitter – Follow us at DiplomaticallyX Related Reports at “International Financial Crisis Channel” - diplomaticallyincorrect.org/c/international-financial-crisis