The question is how governments that are under pressure from the markets can alleviate the pain. Portugal and Spain would get significant relief, using this or a similar measure to take care of up to 40% of their funding according to one estimate at much lower rates. Germany on the other hand, which enjoys by far the lowest funding costs, would suffer.

Gary Jenkins, head of research at Evolution Securities wrote this morning: “That leaves the “muddle through” option of the ECB buying more bonds or a complete implosion of the euro area with financial support withdrawn from the damaged sovereigns leading to inevitable defaults across the region. Not sure at this stage at which one I would put my money on if I was a gambling man.”

Angela Merkel, by jumping the gun ahead of the European financial ministers meeting and ruling out both a eurozone single bond issuer and an extension of the bailout fund has taken away two of the possible positive outcomes to the crisis for Europe. It is very hard to see what the other European policymakers can now do to assuage market concerns in the short term. The situation is becoming increasingly dangerous. That basically means a continuation of the status quo, which is the worst case scenario. The lack of agreement is the most damning thing in this situation and has dashed analyst hopes of a more comprehensive solution sooner rather than later.

The main question is whether we will get support for the European project from those who would suffer the most from pooling credit quality in Europe. The deceptive strength of these countries is undermined by the exposure of their own banks to the burgeoning crisis hit countries in Europe.