It's all coming down to the ECB. While a political solution to the euro zone problems await, it is the ECB that is keeping everything afloat. That's why tomorrow's (Thursday's) ECB meeting is so important.
I'm not kidding: the Bank of Italy says Italian banks borrowed 153 billion euros from the ECB in November, up from 111 billion in October and nearly 4 times what it borrowed (41 billion) in June.
So everyone can talk all they want about "kicking the can down the road," but without the ECB it's pretty clear Italy would have rolled over. I can't think it's any different with Spain.
Today's action is, understandably, quiet. But midday, the euro has again rallied, and U.S. stocks have followed. "I think guys WANT to buy it so we blow off hints of a lesser deal than anticipated, the question becomes what is enough to let guys buy into the end of the year?," one trader wrote.
Indeed, what is enough to justify buying? It's hard to say where the bar is set. What can the ECB do? In the absence of no political agreements, it's likely there will be small steps, and no "bazooka talk."
1) More easing. Certainly a 25 basis point rate cut, but if that is it the markets are likely to be disappointed. A 50 basis point cut? Possibly, particularly if they lower their economic outlook for 2012 and introduce a gloomy outlook for 2013, which seems likely.
2) More help for banks. Quite likely. Lots of talk of giving longer-term loans — 2 or 3 years — to banks to ease liquidity problems.
3) Loosen collateral requirements for loans. Remember, the ECB provides loans to sovereign countries. They give out money and take collateral (sovereign bonds) in return. The more sovereign countries borrow, the more collateral they have to put up. So there is active speculation the ECB will lower collateral requirements for loans.
4) More bond buying. They will certainly continue to buy bonds, but how much? They have already bought north of 207 billion worth, all in the secondary market.
Why not just announce a big sovereign bond buying program directly from euro zone countries? Draghi does not appear to have the legal authority to do so. Lest you doubt me, here is Article 101 from the treaty establishing the European Community:
"Overdraft facilities or any other type of credit facility with the ECB...shall be prohibited, as shall the purchase directly from them by the ECB...of debt instruments."
This is pretty clear: the ECB cannot buy sovereign debt directly. They can certainly do so indirectly, through the secondary markets, but even here it is unclear how far they can go.
5) Downplaying inflation worries. Draghi needs some cover if he wants to expand the bond buying program in the future. He's already made comments to this effect.
6) Less likely: "bazooka talk." Something grandiose? Large-scale ramping up the SMP? Quantitative easing? Way too early, most traders say.
_____________________________
Bookmark CNBC Data Pages:
_____________________________
Want updates whenever a Trader Talk blog is filed? Follow me on Twitter: twitter.com/BobPisani.
Questions? Comments? tradertalk@cnbc.com