The EFSF is a vehicle which issues bonds guaranteed by Euro area sovereigns, with the purpose of on-lending the funds to sovereigns in need of liquidity. The guarantees are provided on a pro-rata basis, with the shares determined by the relative weights in ECB's capital subscription key (broadly reflecting GDP weights). When a sovereign accesses liquidity, it stops providing guarantees, and the remaining guarantee weights are readjusted (each sovereign still guarantees the same amount in nominal terms, but its guarantee weight rises out of the total overall amount).
In its original form, the EFSF included total guarantees worth 440B but, in order to keep its triple-A status, the fund could on-lend at most 255B, the amount of guarantees provided by triple-A rated sovereigns. In its new form -- approved by Euro area finance ministers in June 2011, but still not ratified by parliaments -- the EFSF's total guarantees were extended to 726B ( a total of 780B from which Greek, Irish, and Portuguese guarantees have been deducted), with the triple-A rated countries contributing around 450B, enough to enable it to lend at least 440B without losing its triple-A status. This lending capacity is of course conditional on the sovereign ratings being maintained as they are. Under the current structure, a downgrade of a triple-A sovereign would clearly reduce the effective lending capacity (a French downgrade for example would reduce the lending capacity to below 300B).
8/11/2011
Assuming ratification for extending powers and effective lending capacity to 440B Euros in September, spare firepower will be 280B Euros. Further expansion, possibly necessary if market pressures persists, would be hard. To fully cover Italy & Spain over next three years, lending capacity would need to be at least double to 880B.
One problem to extension would be that the size of new commitments means sponsoring sovereigns would accumulate large amounts of contingent liabilities, something that would risk impairing their own financial solidity without the support of an appropriate governance framework.
