The prime concern is that debt holders - with credit default swap contracts to hand - who do not want to take part in a voluntary Greek debt exchange programme will receive only partial payment from the Greek government on the bonds they hold, but their swap contracts will not pay out to cover their losses.

Eoin Treacy's view As early as May, investors were voicing the opinion that any form of restructuring of Greek debt would be construed as a default and CDS contracts would become payable. However, the International Swaps & Derivatives Association (ISDA) seems to have had other ideas. The Greek "technical default" will not now result in additional cash flows for those who were seeking protection from just such an eventuality.

Hedge fund managers and pension funds worried about whether CDS are fit for purpose but who still want to express a bearish view have probably been avoiding the CDS market since late July and been more active in shorting the bonds of countries such as Spain and Italy.

Over the weekend, the ECB announced that it was going to start purchasing Spanish and Italian bonds in an effort to calm the markets. Here is a section from an article by Andrew Davis for Bloomberg:

The European Central Bank's move to buy Italian and Spanish bonds to tame the region's debt crisis marks a step toward the kind of fiscal union that Germany has opposed since the founding of the single currency.

While investors and economists say tighter fiscal ties and increased transfers to the financially weak euro states will be needed to end the financial contagion, purchases of Italian and Spanish debt that Royal Bank of Scotland Group Plc estimates may eventually reach 850 billion euros ($1.2 trillion) threaten fresh political fault lines.

"This huge-risk pooling exercise will not come easily and the risk of political fallout will be large," Jacques Cailloux, chief European economist at RBS, wrote in a note. "This might be the necessary and painful step required to pave the way for the creation of a common debt instrument, the quid pro quo for this might be the loss of fiscal sovereignty."

The unwillingness of euro leaders to forge a U.S.-style federal fiscal union with the monetary union that now joins 17 states has been a handicap that has fueled economic imbalances in the region, analysts and investors including billionaire George Soros have said. Germany, the biggest euro economy, has long resisted such a set-up, saying it would discourage member states from enforcing budgetary rigor.

The ECB has so far been opposed to quantitative easing and has attempted to sanitise its purchase of €77 billion of Greek, Irish and Portuguese debt by selling short-term paper. However, Spain and Italy's bond markets are considerably bigger than the other peripheral nations. Making purchases large enough to have an effect on these markets will require considerably more capital. It is questionable whether the ECB can unilaterally sanitise the increase in its balance sheet required to absorb that much debt. What are its options?

Quantitative easing is the easiest solution but potentially courts inflation and is counter to its Bundesbank roots. The Fed could reopen swap lines with the ECB allowing it to borrow vast sums at a low cost. This would amount to QE3 for the USA. The ECB may also be anticipating that any actions its takes now are temporary because once the EFSF is set up it will be able to take over the debt and allow the ECB to return its balance sheet to normal.

Italian and Spanish spreads fell sharply today which is a good start to this purchase program. However significant additional capital injections will be required to keep yields from surging again.