“Apparently there are but three options:

“1) Interest rate goes way up and the countries go bankrupt
2) EU guarantees payment (printing money) which amounts to issuing euro bonds
3) Countries go into default and we have a crisis worse than '29

“It would appear that the only option is (2) If there is no choice why are they taking so long?”

Eoin Treacy's view European banks need to be recapitalised. This is as true of peripheral as core financial institutions. The survival of the European financial sector is predicated on all EU sovereigns paying back their debt at par. The removal of the private sector participation clause from Friday's announcement recognises this fact.

However, that is where the situation gets messy. As the graphic you attached indicates France, Italy and Spain have a large funding requirement in the first few months of next year. Today's auctions went reasonably well with French, Italian and Spanish yields all closing well of their respective highs. However without a guarantee that the ECB will backstop the debt of member nations, investors can have no confidence that the next auction will go as well. High volatility should therefore continue to be expected as long as the crisis continues.

A subscriber kindly forwarded this note by Daniel Gros from the Centre for European Policy Studies, dated December 8 th , which effectively summarises the situation. Here is a section:

The task for this European Council is to find an agreement that can resolve the implicit standoff between the ECB and the politicians. A formula must be found that allows Angela Merkel and Mario Draghi to declare victory (something that can be called a fiscal union), but is still acceptable to all other member countries. If this can be achieved, the ECB will presumably feel empowered to provide a liquidity backstop until the tensions subside. This does not imply that the ECB should go out next Monday and buy massive amounts of Italian and Spanish debt. It will be enough if investors know that the ECB will in future stand ready to intervene should risk premia rise again to unreasonable and unsustainable levels. Even with the best agreement, the crisis will not suddenly be over, but it could at least be contained, thus giving countries such as Italy or Spain the time they need to show that they can get their deficits under control and turn their economies around.

The balance of probabilities remains that the ECB will expand its balance sheet to help absorb some of the pressure Eurozone debt markets are experiencing. Bond investors are likely waiting for evidence.