The first question we all have is what, if any role, will the Fed have in this gigantic bailout. The answer is, nothing visible. The Federal Reserve will probably remain on the sidelines, waiting to see if any more assistance will be needed. In short, the Fed will probably backstop any deal made by the Europeans among themselves.
The Telegraph outlines the high points:.
First, Europe's banks would have to be recapitalised with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis. The recapitalisation plan would go much further than the €2.5bn (£2.2bn) required by regulators following the European bank stress tests in July and crucially would include the under-pressure French lenders.
Officials are confident that some banks could raise the funds privately, but if they are unable they would either be recapitalised by the state or by the European Financial Stability Facility (EFSF) - the eurozone's €440bn bail-out scheme.
The second leg of the plan is to bolster the EFSF. Economists have estimated it would need about Eu2 trillion of firepower to meet Italy and Spain's financing needs in the event that the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target.
The complex deal would see the EFSF provide a loss-bearing "equity" tranche of any bail-out fund and the ECB the rest in protected "debt". If the EFSF bore the first 20pc of any loss, the fund's warchest would effectively be bolstered to Eu2 trillion. If the EFSF bore the first 40pc of any loss, the fund would be able to deploy Eu1 trillion.
Using leverage in this way would allow governments substantially to increase the resources available to the EFSF without having to go back to national parliaments for approval, which in a number of eurozone countries would prove highly problematic.
Greece, probably Portugal, and perhaps Ireland would all be put on a track for a "managed" default. This is not good news for those country's bond holders. If they're lucky, they might receive 50 cents on the dollar. The advantage would be that all those countries would stick with the Euro and remain in the euro zone.
Germany is still going to want to see Greece go through with its austerity package. But the advantage of this plan is that it does not require approval of parliaments; it can be implemented by the ECB and heads of state.
It certainly is an ambitious plan. Will it work? Looks good on paper but the execution might leave something to be desired. The fear is that after all these maneuverings, 2 trillion euros might not be enough.