THE grand bargain postulated before last week's fruition - that the euro zone governments would agree a fiscal pact in return for the ECB buying lots of government bonds - hasn't quite happened. But perhaps it is being done via a different route.
The ECB did agree to lend money on extended terms to European banks, and relaxed its collateral rules. The move was generally welcomed as a sign that Europe was ready to stop a Lehman-type collapse resulting from the freeze in the interbank lending markets.
But euro zone leaders have been hinting quite broadly that the banks can take that money from the ECB at 1% and invest the proceeds in government bonds, and earn a very nice yield premium along the way. This is a sort of back door QE, or perhaps bank door QE is the better name for it. In the early 1990s, the Fed deliberately engineered an upward-sloping yield curve to allow US banks to rebuild their balance sheets after the savings & loan crisis; borrowing at 3% and investing in Treasury bonds at 6-7%.
There are some questions over whether banks will take this risk, given that they might have to mark to market any losses on their government bond holdings. And there is no sign yet that this bargain is having much of an effect on bond yields.
Of course, this bargain is on a cynical view, like two drowning men hanging on to each other; bankrupt banks supporting bankrupt governments. The taxpayer stands behind both, of course, but this kind of deal is designed to create an implicit commitment on the part of taxpayers without making the costs explicit to voters.