What Trichet actually said: Eurozone eyes new deal for Greece; ECB issues threat

ECB officials have warned for weeks that a debt restructuring would have catastrophic consequences for the euro zone and stepped up their rhetoric this week after Eurogroup Chairman Jean-Claude Juncker suggested the bloc was open to a voluntary extension of Greek debt maturities.

"For the ECB, according to our statutory obligations, a debt restructuring would undermine the collateral adequacy of Greek government bonds," the ECB's Stark said.

"This means that a debt restructuring would make the continuation of large parts of central bank liquidity provision to the banking system of Greece impossible."

The comments, and a report in the Financial Times Deutschland, that ECB President Jean-Claude Trichet had issued the same warning to euro zone finance ministers in a heated meeting of the Eurogroup on Monday, weighed on the euro, which slipped to $1.4235.

This may have a simple solution: the Greek commercial banks are put through a special resolution scheme. Good assets (not including Greek sovereign bonds), deposits and branches are put into "good banks"; bad assets (and Greek sovereign bonds) are put into "bad banks". The bad banks are given equity stakes in the "good banks".

Then the ECB cannod deny liquidity to the "good banks".

Economics is politics by other means