Political turmoil in Italy and Greece is complicating efforts to increase the firepower of the euro zone's bailout vehicle to 1 trillion euros, an official at the European Financial Stability Facility said on Friday.
Euro zone countries had hoped to increase the EFSF's lending capacity by December, combining bond insurance with investment vehicles. But after the government in Athens fell and bond markets pushed Rome to the brink of a bailout that the euro zone cannot afford to give, the Luxembourg-based EFSF thinks it may be more realistic to aim for less leverage.
"The political turmoil that we saw in the last 10 days probably reduces the potential for leverage, so that may be only by three to four times, instead of four to five," the EFSF source said.
Investors have shunned bonds issued by highly indebted euro zone countries and luring them back by offering insurance on losses, the centerpiece of a plan agreed in Brussels late last month, would probably use up more of the fund's resources.
After deducting the EFSF's existing emergency funding programs, the rescue fund has 250 million euros ($340 billion) to leverage.
The EFSF says it expects financial markets to improve as Greece appoints a new crisis cabinet and Italy votes on austerity measures demanded by the European Union, taking more dramatic action to reassure investors it can reform its economy.
But investors were already questioning how the EFSF would reach the 1 trillion euro level -- aimed at helping Italy and Spain if they were shut out of capital markets -- after the October 27 agreement.
The idea of raising the firepower via possible special purpose vehicles financed by sovereign wealth funds and other global investors is in some doubt because of a lack of clarity on incentives for countries such as China or Brazil to invest.
EFSF head Klaus Regling acknowledged some of that confusion complicated the fund's 3 billion euro bond sale on Monday, when yields reached the highest level so far of the EFSF's four issues. "A reason there might be uncertainty is that we have not been able so far to give all the details on how we intend to do the leveraging," he said in Brussels this week.
Meanwhile, the euro zone bailout fund will issue T-bills in December with maturities of up to one year in order to create a liquidity buffer to allow it to react rapidly, the EFSF said. "The program will be ready when needed," the source said. ($1 = 0.736 Euros)