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The big news overnight was that rating agency Standard & Poor's downgraded Greece to selective default - a delayed reaction to the implementation of the private sector debt swap that was agreed last Monday. So far no surprise, but what was a surprise was the announcement this morning from the ECB that it is temporarily suspending Greek bonds for us as collateral to access its funds.

Without funds from the ECB then Greek and Cypriot banks (whop hold a quarter of all Greek government bonds) would no doubt go bust. The problem for the ECB is that the second bailout for Greece that will included EUR 35bn to help re-capitalise the banks, is not yet agreed. But, fear not, banks in Greece won't be left to go to the wall, instead the Emergency Liquidity Assistance programme will now be activated - which in effect means that the Greek government has to underwrite all the collateral used by Greek banks between now and when the EUR35bn new funds are released, which is expected to be sometime in mid-March.

That sounds like a funny sort of union to me: while European officials debate the second bailout for Greece in their domestic parliaments, the activation of the ELA means that Greece will see its liabilities expand in the coming weeks as it underwrites its banks' loans from the ECB - thus making its financial position even worse and strict fiscal targets potentially harder to achieve.

Markets are conveniently forgetting this today as risk rallies: stocks are higher, the euro is well supported and Europe's banking stocks are also higher. However it's worth remembering that French banks also hold a sizable amount of Greek government debt so today's move by the ECB may also impact their ability to get Eurozone funds at tomorrow's auction.

Time and again the smartest people have said that the only way to solve this crisis is to transfer some of the risks from the financially weak states (like Greece) to the financially strong (say Germany), who can afford to deal with it. This is happening to some extent, hence the second bailout, but not wholeheartedly, which is going to make this crisis a long, protracted battle and one that won't be solved easily.

The other main event in the last 24 hours is that the International Swaps and Derviates Association (ISDA) has been asked to determine if the Greek PSI deal is a credit event and thus whether credit-default-swaps should be triggered. We will know its judgement by 1700GMT tomorrow. Although this event is ladled with symbolism, it is not that big a deal if a credit event is triggered. The reason for this is that insurance written on Greek debt is fairly small, although it could rattle nerves in the markets. The biggest risk is obviously for the banks that wrote the insurance, the other risk is the contagion effect - if triggering Greek CDS's infect investors' appetite for Italian and Spanish debt where a lot more CDS insurance has been written.

Enough of my musings on the macro/ political debate, the markets have barely blinked at the news. Although Greece was placed into selective default during the US session yesterday the Dow still managed to close above the key 13,000 level. Likewise, the S&P 500 index rose to its highest level in more than a year, and both indices are poised to open higher according to futures markets.

EURUSD stumbled a little after the ECB/ Greek collateral news, but it remains comfortably above 1.34, and the next support of note is 1.3390 - the low from the Asia session. As we said yesterday, there is a high chance that we could see another attempt at 1.35 before the bulls get fatigued. Obviously tomorrow is the key day for markets. The ECB LTRO auction takes place tomorrow at 1000GMT (the results should be known by 1030GMT). This is a difficult one to predict.  The markets expect banks to suck up EUR 500bn of loans so anything less would be considered a disappointment and could cause markets to dip. In the event there is a large take-up then we could see a relief rally, although the very loans themselves are coming under attack.  Some argue that they are not dealing with the real problem: the solvency of the Eurozone, and in fact the loans are spurring a peripheral debt buying spree, which is actually loading up Europe's banks with more risky assets when they should be de-risking themselves.

Stocks are also rallying on the back of a slight retreat in the oil price. Brent crude is below $123.50 after reaching as high as $125.50 last week on the back of Iran tensions. If tensions subside then we may see a slow retreat by Brent crude back to the $115-$120 zone in the coming days and weeks.

There are some very tentative signs that risk may be starting to peak a little today and we may see some profit taking/ range bound activity as we lead up to tomorrow's auction. EURJPY is making hard work of breaking above 108.50. Likewise, AUDUSD has failed to break above 1.0800 today and is trading in a tight range between 1.0750 (21-hr sma support) and 1.0780. Copper - a key lead indicator - is higher today, although it may be boosted by yesterday's strong pending home sales in the US for January.

I will be watching the Eurostoxx banks index closely over the next 24 hours to see how investors react to the LTRO and also looking at other lead indicators like copper, the Nasdaq and the Dow Jones Transportation Index to try and gauge whether investor sentiment is boosted by the ECB's LTRO or whether second time round its magic on the markets is slightly less potent.

Finland votes on the second Greek bailout later today and Italy auctions 5 and 10-year debt.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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