A senior European Central Bank member says euro zone officials are working on ways to magnify the financial firepower of the euro zone's rescue fund to fight a sovereign debt crisis more effectively.
ECB executive board member Lorenzo Bini Smaghi said in New York that European policymakers had already begun discussing the next steps to quell a crisis that threatens to derail a fragile world economic recovery.
The €440 billion rescue fund's assets could be used as collateral to borrow from the ECB, making more money available to stop the crisis spreading. But Bini Smaghi said it was up to EU governments to decide how to do this.
"I know that people are thinking about these things. They may not be willing to admit it in the public, but they are thinking about these things," he said, citing US programmes used to rescue banks in the 2008-9 financial crisis.
But German Finance Minister Wolfgang Schauble said there was no plan to boost the size of the euro zone rescue fund. He told television channel NTV, however, that the European Financial Stability Facility would be given the tools "so it can work if necessary".
US President Barack Obama said the sovereign debt crisis in Europe is "scaring the world" and that European leaders are dealing with the issue but not as quickly as needed.
"They're going through a financial crisis that's scaring the world," Mr Obama said at a ‘town hall’ public meeting in Mountain View, California.
Europe's financial and fiscal problems had contributed to a slowdown in the economic recovery of the United States, he said.
Meanwhile, euro zone officials in Brussels played down media reports of emerging plans to halve Greece's debts and recapitalise European banks to cope with the fallout, stressing that no such scheme was yet on the table.
Europe came under fierce pressure from the US and other major economies at weekend talks in Washington to take swift, decisive action to stop Greece's debt woes engulfing bigger euro zone states and wreaking wider damage.
But officials said reports that planning was already in place for a 50% writedown in Greek debt and a vast increase in the EFSF were highly premature.
Greek Finance Minister Evangelos Venizelos also dismissed reports that he had discussed an orderly default with International Monetary Fund chief Christine Lagarde and European Central Bank head Jean-Claude Trichet.
German Chancellor Angela Merkel, struggling to convince her fractious centre-right coalition to back a strengthening of the EFSF in a crucial vote on Thursday, warned that letting Greece default would destroy investor confidence in the euro zone.
Euro zone officials acknowledge that the EFSF is not big enough to handle a bail-out of Italy or Spain, the region's third and fourth-largest economies. But there is no clarity on how the fund could be raised without more guarantees.
One idea is for the fund to act as an insurer, guaranteeing the first portion of losses on Italian or Spanish debt. That could "leverage" its capacity four or five times, but the legality of such a scheme remains to be established and nothing has been put to euro zone finance ministers.
Another proposal would be to turn the EFSF into a bank, which would allow it to access ECB funds, meaning that it would effectively have unlimited capacity. But the ECB has raised concerns about such a step, which would politicise the bank's operations and put it on the line for massive liabilities.
