In a nutshell, we think that a combination of (i) rollover into longer dated/low coupon Greek bonds with some form of collateralization/guarantee by the EFSF, (ii) earmarking a fraction of the anyway necessary additional lending to Greece for debt buy backs, (iii) pre-emptive recapitalisation of Greek banks would be an acceptable solution for the ECB, thereby ensuring that access to collateral will be maintained and (iv) a reduction in the interest rate and maturity extension for the official loans to Greece. We ascribe a 70% probability to this scenario. In an alternative scenario (30%), the governments would blink at the possibility that the ECB still refuses to refinance Greek banks with post-selective default securities and head for a tax on banks instead.

We expect the Eurozone summit to go "beyond Greece" and also offer some preemptive action on the other peripherals. We expect the option to extend support to Portugal to be spelled out, as well as a rebate on the interest rate paid by Ireland on its loans. Ideally, but the Europeans would also agree to make the EFSF even more flexible and allow it to intervene on both the primary and secondary markets, possibly beyond the countries under program (the latter being quite a stretch in terms of political acceptability in the core countries). This - in practice a takeover of the ECB's SMP by the EFSF - would actually boost the chance that the central bank would regard a "Selective Default" event benevolently.

Eoin Treacy's view This is a plausible scenario and today's decline in Eurobund prices suggests investors may be starting to take a more sanguine attitude to the Eurozone sovereign debt crisis at this stage.