ANALYSIS:The efforts to date on the emergency bailout scheme have fallen short of the mark, writes ARTHUR BEESLEY

THE EUROPEAN Commission has taken a calculated risk in its demand for agreement within weeks on bolder measures to finally break the euro debt siege.

Ireland could become a beneficiary as radical reform of the euro rescue fund could clear the way to reduce the interest rate on bailout loans, but a deal is not yet in sight.

As a high-stakes political debate nudges forward, however, both the scope and scale of the emergency bailout scheme that EU leaders put in place last May are likely to be expanded.

EU commission chief Jose Manuel Barroso was not specific yesterday when he spoke of the measures required to reinforce the European Financial Stability Facility (EFSF) but his insistence that agreement can be reached by the time EU leaders gather for their first summit of the year in only three weeks smacks of urgency.

It also reflects frustration that the combined might of the efforts made to date have fallen well short of the mark in terms of instilling investor confidence in the weakest members of the single currency, whose troubles present problems for all.

Even though a relatively successful bond action by Portugal has bought time for all in this milieu, no one is under any illusions that the game is won.

There are three core proposals to expand the European Financial Stability Facility and to increase its lending capacity, to empower it to buy sovereign bonds and to provide credit to euro countries without forcing a stringent EU-IMF reform programme on them.

Each of these, however, is riddled with difficulty.

In principle, the EFSF was set up to lend as much as €440 billion to distressed euro countries.

In reality, however, its lending capacity is limited to some €250 billion due to the need to set aside collateral to maintain the triple-A credit rating which enables it to borrow money on capital markets at preferential rates.

One option is for euro countries to increase their guarantees to the EFSF by some €200 billion.

Another is to relax its collateral rules to boost its effective lending ceiling.

Each presents problems.

Deeper guarantees increase the financial call on euro governments. Weaker collateral rules may mean the triple-A rating has to be sacrificed, increasing the EFSF’s own funding costs.

Giving the EFSF the capacity to buy sovereign bonds would mirror powers already deployed by the European Central Bank. This would provide an additional defence against market turmoil, giving further scope to support distressed euro countries.

But intervening in secondary bond markets in this way would amount to a fundamental change in the EFSF’s remit, removing the strong policy conditionality that is attached to its existing operations. How that would go down with German opponents of bailouts can only be guessed.

The same goes for the extension of any ad hoc credit lines to countries that come under market pressure. To avoid intrusive IMF-like policy strictures, such countries would have to be seen to be in full compliance with their obligations under a reinforced Stability and Growth Pact. As such they may benefit from lower interest rates.

This is relevant for Ireland as the availability of cheaper EFSF credit might force a rethink on the 5.7 per cent interest rate on Ireland’s bailout loans. This very topic will surface on Monday night when euro zone finance ministers gather in Brussels.

Each of these proposals is highly-contentious politically. After all, any change to the EFSF’s framework agreement – as its constitution is known – requires parliamentary approval in 17 countries. This cannot be overlooked, not least in Germany where anxiety about bailouts to profligate states is a defining feature of the debate.

While each measure requires the explicit support of the EU’s partners in the IMF, its chief Dominique Strauss-Kahn has been pressing for a tougher response to the crisis.

Barroso has a job on his hands to bring heads of state and government on board, but his approach suggests he believes a pact can be struck soon.

Whether that brings the crisis to an end is another matter.