That multiplier is the reason European officials such as Sarkozy say the EFSF’s impact will be upward of $1.4 trillion.
Much of the fund’s $600 billion is already tied up in loans to troubled countries and perhaps only $250 billion to $300 billion is available for the new firefighting mission, according to analysts.
Details of the EFSF programs are expected to be completed during the next month.
Analysts, already skeptical, have reeled off a list of legal, technical, economic and political hurdles the fund faces. Some think the amount of money involved remains inadequate, and insist that the European Central Bank ultimately will have to stay involved in bond buying and other measures it is hoping to curb.
Others say the fund could create new risks if it strains the finances of economically solid nations such as France. As the second largest euro-zone economy, France is one of the main guarantors of any bonds the EFSF issues, and the country’s AAA credit rating is critical for the facility to borrow at the lowest possible rates.
Increasing the reach of the fund without increasing the money in it “means more risk,” said Daniel Gros, director of the Center for European Policy Studies, a Brussels think tank.
There is also skepticism about whether the insurance proposal will make a difference for interest rates. If investors don’t trust that Italian policies are sound, bond insurance is not likely to matter. That’s because a default by Italy would likely involve losses to bondholders of much greater than 20 percent.
Even more important than the effectiveness of the rescue is whether slow-growing economies can rekindle growth, which could make the debt burdens easier to bear. Despite the intense talks and major new programs, “without growth we will not be able to overcome the current situation,” European Commission President JoséManuel Barroso said.
Birnbaum reported from Berlin.
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