1) Member states of the eurozone agree on the need for a new treaty creating a common treasury in due course. They appeal to European Central Bank to co-operate with the European financial stability facility in dealing with the financial crisis in the interim – the ECB to provide liquidity; the EFSF to accept the solvency risks.
2) Accordingly, the EFSF takes over the Greek bonds held by the ECB and the International Monetary Fund. This will re-establish co-operation between the ECB and eurozone governments and allow a meaningful voluntary reduction in the Greek debt with EFSF participation.
3) The EFSF is then used to guarantee the banking system, not government bonds. Recapitalisation is postponed but it will still be on a national basis when it occurs. This is in accordance with the German position and more helpful to France than immediate recapitalisation. Continue reading »