A debt restructuring -- with options ranging from an extension of maturities to a writeoff of principal -- remains officially taboo, with the most vocal opposition coming from the ECB. Bending its mandate to focus on fighting inflation, the Frankfurt-based central bank has bought 76 billion euros of bonds of fiscally struggling countries in the past year and would suffer along with private investors in a restructuring.

Default is "just a nightmare," ECB council member Christian Noyer said in Tokyo today. "It's the absolutely wrong solution. It would be a catastrophe."

Greece's chances of escaping a restructuring hinge on the fickle public mood in Germany, which crafted the euro's low- deficit rules and as Europe's largest economy is the biggest guarantor of the unprecedented loan packages.

Forty-one percent of Germans oppose further financial aid for Greece, with 48 percent in favor, according to an Emnid survey published in Bild am Sonntag yesterday. Some 58 percent voiced "very low" or "quite low" trust in the 12-year-old euro, up from 54 percent in December.

Eoin Treacy's view A restructuring of Greek debt appears inevitable but the slow motion nature of the deterioration has allowed investors to distinguish between those most and least affected. A clear divergence between Greek, Portuguese and Irish CDS spreads compared to those of Spain and Italy has been evident for a number of months. However, as the crisis has deepened of late, attention is beginning to refocus on the European banking sector.

The media has mostly focused on the sovereign debt crisis as it applies to individual countries and economies. However, I thought it might be instructive to review the European financial sector in an effort to ascertain if a similar differentiation is evident.

Broadly speaking, the DJ Europe Stoxx 600 Banks Index has outperformed the DJ Euro Stoxx Banks Index. However neither has a particularly encouraging chart pattern. I performed a Chart Library High/Low Filter for the members of the Europe Stoxx Banks, Financials and Insurance sectors. Here are some impressions:.

Greece's problems stem more from government fecklessness than bank governance. However, its banks continue to deteriorate as the scope of the austerity required by the European commission becomes increasingly clear. Bank of Greece has been ranging mostly above €30 since July but is currently testing its January low and a clear upward dynamic is required to indicate a return to demand dominance in this region. National Bank of Greece broke below its January low four weeks ago and is currently testing the €5 area. Piraeus Bank has a similar pattern.

In Spain, Banco de Valencia remains in a consistent medium-term downtrend. It is somewhat oversold in the short-term but a sustained move above €4 would be required to begin to question the consistency of the decline. In Italy, Unione di Banche Italiane has encountered resistance in the region of the 200-day on successive occasions since mid 2007. It is currently testing the March 2009 low just below €6 and a clear upward dynamic would be required to reaffirm more than temporary support in this area.

While on aggregate most European banks remain rangebound, relative weakness has not been restricted to the periphery. Commerzbank broke downwards from an 18-month range in April and continues to deteriorate. While oversold in the short-term a clear upward dynamic would be required to question scope for additional weakness.

In the UK, I do know to what extent Schroders holds Eurozone peripheral assets or what other negative factor may be affecting it, but it posted a large weekly key reversal two weeks ago. It is now testing the 200-day MA, in what has so far been a similar reaction to that posted in early 2010. However, it needs to find support quickly if the medium-term uptrend is to remain consistent.

Standard Chartered which is more leveraged to China than Europe has lost uptrend consistency. It has posted a larger reaction, the 200-day MA has turned downwards and it has so far encountered resistance below it. This might all be rationalised by the fact that the share is still consolidating above the previous peak but it needs to sustain a move above 1700p to question current scope for an additional test of underlying trading.

Banking sectors generally have deteriorated over the last few months. As a result stock markets deserve a high risk premium in the short term.