Euro crisis: The long and short of it

No-one thinks the eurozone crisis is over or that European leaders did enough last week to rule out nasty surprises in the next few weeks, but talking to officials, economists and analysts closer to the trading floor in the last few days, something has changed that I'm going to take as a sliver of good cheer.

What's new is that the people closest to the markets are no longer the most pessimistic.

For most of the past six months the opposite has been true. Bankers and those closest to the money markets have been more frightened, more quickly, about Europe's financial system and its economy. The rest of the world has then followed them down.

The money men probably reached the slough of their despond towards the end of November. That was when some were starting to seriously question whether Italy was losing access to the financial markets and when the lack of official activity in the wake of the Cannes Summit had become painfully apparent.

Don't get me wrong: those same analysts and traders are still gloomy today and they're still nervous of what's to come, but the air of barely-suppressed panic has subsided.

If you ask them why, they will tell you it's all in the tail: the "tail risks" that loomed so large a few weeks ago have receded.

What does that mean in plain English? It means that a truly catastrophic disaster, for example a wholesale freezing up of financial markets following a massive bank failure, or a run on banks, looks less likely to happen next week or next month than it did before. It's not impossible, but it's much less likely.

Does that mean that the eurozone governments did something important after all and that the summit was a secret success? The answer is no.

Part of the credit for this change of mood goes to the US and relatively good news about the US recovery, but most of the credit has to go to the world's leading central banks, including the ECB.

It is they who have once again stepped in with more liquidity life support to keep the patient stable while governments continue to struggle to come up with a cure.

On this telling, the co-ordinated central bank action on 30 November marked a turning point. That, followed by the more generous lending facilities for banks announced by both the Bank of England and the ECB, have sent an important signal to the financial system: that the authorities are willing to do a lot to avoid an important financial institution running out of money.

As Robert Peston has noted, this is still quite possible, but the Italian and other banks that have caused so much concern do now have somewhere to go when no-one wants to lend to them, and when the assets they've got left to put up as collateral (small business loans, for example) are not the kind that central banks (or anyone else, for that matter) will usually accept.

Now such institutions can go to their national central banks for support.

It's true that the ECB has insisted that the credit risk for this kind of lending - lending in exchange for illiquid collateral - should remain on the national central bank's balance sheet, not be carried by the euro-system as a whole.

But it has permitted that lending to happen, and it will fund it. As I said last week, that means the ECB has become even more of a lender of last resort than it was before.

In a very real sense, Europe's central bank is now propping up the national financial system and, by extension, the broader economy in these nations, not just individual banks.

President Sarkozy made this explicit on Friday, talking about banks using the new lending facilities to buy government debt (something that, of course, has happened for a long time and I have written about many times before).

The ECB will not welcome him spelling out the linkage between the ECB propping up banks and the banks then propping up governments, but if anything it is more apparent now than it was before.

If you are the ECB, you want to remind Mr Sarkozy that there are still important differences between these lending facilities and its purchases of government bonds.

I've talked about this in the past: the big difference lies in the collateral demanded in return for this emergency liquidity and the fact that banks are "voluntarily" buying government debt. It is a private sector decision, not an official decision to provide money to governments.

But even to state these two distinctions reminds us how they have been further muddied by the past few weeks. The collateral is not what it was and nor is the voluntarism, especially when you have the French president publicly exhorting banks to buy bonds, and regulators all now telling banks to do the same.

Economists look at all this and see a short term stopgap, at best. The fact that central banks have once again been forced to step in is, for them, only further proof of how far governments still are from a lasting solution.

Few in the markets would disagree and, as I said at the start, no-one I talk to could be described as upbeat about the euro. Nervousness still reigns, but the anxiety in the markets is not what it was a few weeks ago.

Put another way: the patient is still gravely ill, but the doctors think he'll make it through the holidays without another crisis. I hope so. I'm away until next week. By then we might have a better sense of whether they're right.