Had the stress test of 2011 obliged the Government to inject as much as € billion into the banks (as was pencilled-in by the Troika staff) – more than twice the figure finally struck in March 2011 – the sustainability of the Government’s debt profile would have been even weaker.
As we said publicly and privately at the time, alternative financing approaches, such as an insurance scheme against extreme loan losses, or a direct recapitalisation by a European entity, would have allocated risk more efficiently. But they were ruled-out by the other side, who argued that no mechanism was available to accomplish this. That was certainly the case for the IMF.