ECB stand ready to limit sustained contagion risks

The ECB are more likely to be reactive rather than proactive in response to the Greek crisis. Should a negative scenario materialize in Greece before the meeting, Thursday's focus will be on how the ECB will react to limit contagion risks in the periphery.

Under a Greek default scenario, the ECB should do away with the capital key and focus purchases on those peripheral markets most affected. This is due to the fact the most likely outcome following a default is a significant widening of peripheral spreads, with absolute yield levels rising (key for the ECB). As flight to quality flows take core yields lower, a simple increase to the length or quantity of QE purchases would be ineffective, explaining the need for more direct action. Thus, while peripheral spreads may widen initially, the ECB stands ready to act and would limit any sustained contagion risks.