The ECB cannot stop the continuing flow of cheap funds to the country because it cannot discriminate between Greek and other banks. Under its current rules, Greek banks can obtain unlimited amounts of funding at ultra-low interest rates under the same conditions as other banks in the euro area. The ECB's first line of defence used to be that banks have to provide it with good quality collateral. But in the case of Greece (and Ireland), banks simply no longer have enough good quality collateral. This is why an important change that has taken place in the financing of the Greek banking system in recent months has received little attention (and has been hidden as much as possible in the official statistics). Greek banks are no longer being refinanced via the normal channels of ECB lending against good quality collateral to so-called ‘Emergency Liquidity Assistance' (ELA), for which the main security for the ECB is the national government guarantee – in this case a government that has just effectively defaulted on its private creditors. In effect, the Greek Central Bank has a license to print euros (as long as the government signs a pledge to make up for any losses).

The European Central Bank cannot tolerate this for too long, of course. But all it could do is to order the Central Bank of Greece to stop granting ELA to Greek banks. This means that at present the ECB cannot apply graduated pressure, which puts the ECB in something of a quandary. Either it leaves the tap on and allows the Greek Central Bank to continue supplying its banks with ELA, or it turns off the tap completely, which would mean the immediate collapse of the Greek banking system. The only way to get the ECB out of this lose-lose situation is to provide market incentives for savers to keep their deposits in Greece.

Eoin Treacy's view Last summer Angela Merkel was quoted saying they would do whatever was required to avoid a disorderly default in Greece. Deciphering the legalese, this equates to doing everything to ensure the default was orderly. Looked at through this lens, we view the actions of various European institutions over the intervening months with greater clarity. It is becoming increasingly clear that Greece has little chance of meeting the various goals set by those providing its bailout. Access to more cash has lent it time, but systemic problems remain which have yet to be dealt with.

However, what has changed is that much more is being done to insulate the Eurozone's financial sector from potential contagion. More than a trillion Euro lent into the banks since December is helping to bolster balance sheets. Liquidity has improved. The Eurozone's equivalent of the TED spread (3-month Euro LIBOR – 3-month German government notes) continues to contract. The Eurozone's yield curve spread, in common with corresponding measures for the USA, UK and Switzerland, has also rallied suggesting easier monetary conditions. The DJ Euro Stoxx Banks index has been ranging, mostly above 110, since early February. A sustained move below that level would be required to question potential for some additional higher to lateral ranging.

The Eurozone continues to face a great many challenges in convincing various populations to accept the permanence of austerity measures without a major currency devaluation or a coherent growth strategy. As a result there are a wide number of potential political and economic flash points which have yet to be surpassed. However provided the ECB continues to accept the role as lender of last resort, the ability of this crisis to overly influence markets has probably passed its nadir.