Metaphorically speaking, as ECB President Trichet correctly put it, “in stormy seas it’s better to be on a large ship than in a small boat”. Having said that, it is no wonder that many of those in small boats are currently seeking to dock to the large ship.
For the purpose of this issue, that debate is a technicality; it does not alter the basic contours of contagion from sovereign debt to financial stability. The ECB’s new term repo (LTRO) window offers another example of how sovereign debt sustainability concerns can affect financial stability.