EFSF/CDO guarantees put German on the hook
@Andy Pellew, Because you're talking about entire countries with completely different structural issues (e.g. banking, housing market, law, benefit systems), no possibility of regular fiscal transfers between countries, no real free movement of working labor (different languages for a start, education standards), there is linked monetary policy but not fiscal/government budget policy, etc.!
Back on topic:
Of the four solutions (Euro breakup, Fiscal Transfers, CDO, Euro debt monetization aka the "Fed" solution), this is likely the least painful *up-front* and buys the most time.
What the CDO solution ultimately relies on are its state-backed guarantees to pay out in the future. For the new expanded vehicle, if you do the sums (and Bernstein has) and include cover for Belgium and Italian sovereign debt, the fund would need Euro 1.5 *trillion* backed by 1.7 trillion in guarantees.
Since the vehicle includes the very states that are currently experiencing the biggest problems and whose guarantees are considered worthless by the market, this puts the core EU countries on the hook, in particular Germany. The German guarantee becomes worth Euro 790 billion or 32% of their GDP! If for any reason France is downgraded, Germany's pro-rata share of funding jumps to 1.385 trillion or 56% of GDP!!
Of course, what is the likelihood of any German government or population paying out that much money in order to keep funding Greece, its creditors and their population's lifestyle? As you can imagine, if the Fiscal Transfer/Political Union solution was unpalatable, this would be inconceivable! Bond vigilantes may decide to go straight for the jugular and start parking themselves at the German sovereign debt desk as well ...
However, as the author stated, the CDO solution does not change anything about the underlying Euro situation. While the inflationary Fed solution was not pursued, you still have an ECB which chooses not to concern itself with the state of periphery nations as well as huge structural imbalances between members of the EMU.
In short, watch this space ...!