The issue is not the EU readiness to act, but Portuguese willingness to raise their hands for the money. Prime Minster Jose Socrates, reluctant to relive the Portuguese "IMF stigma" of the mid-1970s, as he is constantly reminded by the press, has watched the political hammering of his Irish  colleague Prime Minster Brian Cowen, after accepting the EU/IMF package, with tremendous alarm. And indeed, Portuguese opposition leader Pedro Coelho has already threatened that he will ride a bailout straight to bringing down Socrates' government.

Last week's 1 billion Euro private placement of 2.5 year notes was meant to reinforce Portugal's ability to tap markets. But while the European Central Bank (ECB) has stepped in to help stem the pressure and bought Portuguese paper, EU officials are not about to allow Portuguese intransigence and domestic political considerations to jeopardize Spain - and the rest of the euro. Alarmed at the spiraling turn of events, the ECB has stepped in and intervened aggressively in frozen European peripheral bond markets, both before and after the Portuguese bond issuance, engineering a "successful" auction. Riding the wave of "success," Bank of Portugal Gov. Costa has now proudly proclaimed the results a stamp of market confidence in Portugal, while Finance Minister dos Santos continues to maintain that Portugal needs no outside help.

For all the brave talk, however, news agencies have since then also confirmed Portugal's close call, reporting on the EU cobbling together a package for Portugal estimated to range from 60 to 100 billion euros. This allows Socrates to continue to try and deliver on his austerity promises without fear of immediate political death. This also gives EU members additional time to flesh out the necessary work needed on strengthening the broader EFSF support package to be in place when the day of reckoning comes for Portugal. So whether Socrates likes it or not, the EU will press hard to have a package for Portugal ready, as EU officials are already looking beyond Portugal to protecting Spain, who they feel have a much better chance of success. 

What is likely to happen from here on? On the "expansion" of the EFSF facility size, the EU's focus will be on effecting what is carefully phrased as an "expanded capacity" and "reinforced lending capacity" for the EFSF, meaning the likelihood of no increase in the 440 billion Euro EFSF headline number, but rather a reworking of the facility to make more of the already pledged 440 available to be put to use.

The argument is that sovereigns already agreed to a 440 billion euro commitment, but due to technical factors in trying to keep an AAA rating, the effective amount ended up lower than envisioned. EU member states will thus need to dramatically increase their guarantee amount in order not just to increase the disbursable amount of the 440 billion euro pledge from its currently estimated 255 billion euro effective limit, but in order to also allow for a release of this "penalty" cash buffer without threatening the EFSF's AAA rating. In the big picture, what all this does of course is transfer some more of the peripheral credit risk onto the northern EU countries. To the extent markets feel that European core countries can afford to lend, or pledge, money in larger amounts and at lower (and thus riskier) rates to their needier neighbors.

The reality, however, is that to make the full 440 available - and, critically maintain the AAA rating - EU sovereigns will have to extend greater guarantees to the EFSF. To meet such long-term funding needs, there are proposals under discussion. One proposal is to continue to charge borrowers a penalty rate, and keep that as a credit buffer, and as a moral hazard disincentive. After all, why should Ireland get money at the same rates as Germany? But the EFSF would then refund some of the "bad credit penalty" back to borrowers as they adhere to their fiscal plans - and their credit standings improve. It is a workable way to ease funding costs (and reward good behavior) over time, and help the peripherals EU countries with their debt load.

One of the other suggestions has been to expand the scope of the EFSF to provide liquidity assistance to sovereigns facing tight market conditions, before getting to the stage of outright loans and bailouts. There are commission studies proposing the EFSF issue bonds jointly with some sovereigns on a selective basis, effectively guaranteeing if they were to face an inordinate, and in the EU's eyes unjustifiable, amount of pressure in the private funding markets. Whatever formulations are being thrashed out, the euro zone is not out of the woods yet...
 
— Professor Mohamed A. Ramady is a former banker and currently visiting associate professor at King Fahd University of Petroleum and Minerals, Dhahran.