EU looking to new €940bn bail-out fund

One option is to let the existing €440 billion EFSF keep lending alongside the European Stability Mechanism (ESM), a new €500 billion rescue fund that was originally designed to replace the temporary EFSF as a permanent institution from July 2012.

With the EFSF already having leant to Greece, Ireland and Portugal sums amounting to €190 billion, the hybrid EFSF-ESM would start up with €750 billion left in the pot.

Other ideas include "leveraging" the EFSF by using part of its cash as a guarantee to borrow from markets more than the current €440 billion it can achieve; having the European Central Bank (ECB) underwrite ESM lending, giving it theoretically unlimited resources; and requesting EU countries transfer up to €200 billion extra to the International Monetary Fund to channel back into Europe if needed.

Many of the models face problems, however.

With markets already showing reduced appetite for EFSF bonds and with countries such as China not keen to contribute via so-called Special Purpose Investment Vehicles, it is unclear how much extra cash leveraging could raise.

The ESM has a stronger legal foundation than the EFSF because it is based on an intergovernmental treaty among the 17 eurozone states and has a sounder financial footing as it is grounded in "paid-in capital" - purchases of shares in the ESM - rather than the weaker "guarantees" of EFSF bonds. But Germany and the ECB itself have said "No" to ECB backing of EU bail-outs until now.

Meanwhile, with national budgets squeezed and with recession looming next year, finding the extra billions for the IMF option could prove politically unfeasible.

The bazooka debate comes after US ratings agency Standard & Poor's on Tuesday warned there is a 50 percent chance it will cut the EFSF's triple-A rating by one or two notches in the next 90 days.

It justified the warning by saying that the some or all of the six triple-A economies which gave EFSF guarantees - Austria, Finland, France, Germany, Luxembourg and the Netherlands - might be downgraded if the EU summit does not deliver a crisis fix.

With Italy and Spain needing to come up with €1.1 trillion over the next three years to service their debt amid an upward spiral in their cost of borrowing, analysts said the current EFSF model is out of date.

"Any prospective downgrade to something that was supposed to be the best thing available is going to diminish investor appetite in the facility, especially if you had doubts about it in the first place," Citigroup bank economist Guillaume Menuet told Reuters on the Standard & Poor's warning.

"The idea that the EFSF is the vehicle to deal with this crisis is losing value," Malcolm Barr, an economist at the JP Morgan bank, said.