Euro Collapses as ECB Steps into Market, What Does this Mean for September

The ECB injected an unprecedented amount of liquidity into the bond markets today after overnight lending rates jumped to 6 year highs. Central Bank President Trichet and company are certainly not enjoying their August holidays given the recent volatility in the financial markets.

Even though we criticize the ECB for downplaying the credit problems last week, we do commend them for acting so quickly in response to changes in liquidity. In an official statement, they are not ruling out the need for further liquidity if calm is not restored in the money markets. Unlike the Federal Reserve, the ECB is prohibited from bailing out banks or anyone for that matter. Therefore if the blowups escalate and yields fail to not regulate themselves, the ECB could change its mind about raising rates in September. If stick to their plans of raising interest rates next month, the rate hike will probably be their last.