Doping control

Euro zone: The euro zone's bailout fund desperately needs an injection of steroids. Leveraging up the European Financial Stability Facility would allow it to buy Spanish and Italian debt more aggressively, helping to calm markets. But for the plan to work, the European Central Bank and Germany's parliament would have to play ball.

There's no question that the EFSF needs more firepower. Though its borrowing capacity is in the process of being expanded to euro440 billion, and it will soon be allowed to buy sovereign debt in the market, the fund does not look up to the task.

Allowing for the sums it has already committed to lend to Ireland, Portugal and Greece, the EFSF has less than euro300 billion left. Though this might finance a Spanish rescue, it's nowhere near enough to help Italy. Buying bonds would exhaust the fund even faster. The European Central Bank has spent about euro70 billion since it started buying euro zone sovereign debt again in August. If the EFSF bought at the same rate, it would run out of cash in five months.

One solution, supported by US Treasury Secretary Tim Geithner, is to leverage up the EFSF by turning it into a de facto bank. The EFSF's remaining guarantees would become the bank's capital. It would then buy bonds and refinance these with the European Central Bank. Even if the EFSF's leverage was capped at, say, 10 times - less than half the level of most commercial banks - its firepower could then rise to about euro3 trillion.

However, the ECB is forbidden from lending to public sector entities, giving it a veto over the idea. And as the central bank's governing council is divided over its relatively modest bond purchases, it seems unlikely, to approve an arrangement that could potentially leave it holding several trillions of euros of sovereign debt as collateral.

Euro zone governments would need to approve as well. Leveraging up the EFSF would increase their financial risks, as they would bear the brunt of any losses arising from a default. Germany would resist what looks like potentially open-ended support for Italy and Spain. Though the euro zone probably does need more financial firepower to fight contagion, it will have to find it elsewhere.