Under pressure from the US and the rest of the international community, eurozone officials are considering a "big bang" plan to increase the size of the European bailout fund to tame financial markets and bring the sovereign debt crisis under control.
A European Central Bank (ECB) board member threw his weight behind a plan, first mooted by the US Treasury, to increase the size of the European Financial Stability Facility (EFSF) by allowing it to borrow additional funds from the ECB.
The comments, by Lorenzo Bini Smaghi (pictured inset) at a conference on the sidelines of the International Monetary Fund, were the first hints that a plan to leverage up the EFSF is being considered seriously by the ECB and the eurozone governments which are contributors to the fund.
The EFSF was conceived as a fund to channel bailout money to eurozone countries that were having trouble servicing government debt, but its ability to fully contain the sovereign debt crisis has been in doubt almost since its inception. Contributors have pledged up to €780bn, though ratification through member countries' parliaments is slow and uncertain.
The plan emerging last night would widen the scope and increase its size, providing additional funds to buy government debt from any countries that might be frozen out of the financial markets, a major fear for core eurozone members Spain and Italy. It would also be able to inject money into any European banks that get into trouble because of losses on government debt, such as are likely to occur if Greece defaults on its debt – something that markets now view as inevitable.
Turmoil in the eurozone is the biggest single threat to the global economy, traders believe, and they have watched political wrangling on the continent with alarm. There was also disappointment that the G20 and IMF meetings over the weekend ended with no major policy announcements, though it was clear that work was continuing at a frenzied pace behind the scenes.
That the solution is by no means secure was underlined when Germany's Chancellor Angela Merkel took the rare step of appearing on a prime-time television chat show in an attempt to halt a dramatic decline in public support for her coalition's plans to contribute to the Greek bailout.