After emotional votes, Slovakia should by Friday have finally ratified the expansion of the European financial stability facility, as Germany has already done. According to its revised statutes, the EFSF 2.0 will be armed with guarantees of €726bn and equipped with a broader arsenal of weapons to fight Europe’s sovereign debt crisis. The revised EFSF can raise some €440bn in market funding at AAA terms, which it can then deploy either for direct loans to eligible states, to buy their bonds in the market or to recapitalise banks. That is good but it is not enough.

A lending capacity of €440bn seems more than reasonable to deal, should it prove necessary, with the debts of Greece, Ireland and Portugal: it equates to approximately 70 per cent coverage of all their outstanding debt. But add Spain to the consideration and that ratio declines to 30 per cent, because the potential demand doubles. Enter Italy and the coverage ratio of EFSF funds to total debt for those five countries declines to about 10 per cent.

While politicians feel they have just accomplished an enormous task, the markets once again feel this lacks credibility. It is evident, however, that another top-up of the EFSF lending capacity is currently politically impossible and might also endanger the creditworthiness of the euro countries that so far remain strong. Therefore there are several suggestions circulating of how to “leverage” the €440bn. Ideas range from granting the EFSF a banking licence that would give it access to ECB funding, all the way to “structured solutions” with asset backed securities.