European finance ministers are reportedly to turn to the International Monetary Fund (IMF) in a bid to prevent the sovereign debt crisis in the eurozone from spiralling out of control, as markets and businesses begin to prepare for the real possibility that the single currency could collapse.
The EU's crisis response mechanism, the European Financial Stability Facility (EFSF), has failed to attract sufficient capital to reassure markets that failing sovereigns can be bailed out, after the collapse of the Greek and Italian governments and worries over the French economy kept potential investors out of the bailout fund.
The EFSF hoped to raise €1tr to invest in sovereign debt and bank recapitalisation, but it has only likely to reach around €600bn, leaving a massive hole in the eurozone's ability to deal with the evolving threats to the single currency. The fund is backed by the eurozone's AAA-rated sovereigns, but concerns that France might lose its top rating, as well as broader long term fears over the euro area, have left it undercapitalised.
The market has been flooded with rumours over where funding could come from, with the most compelling being that the IMF was preparing a massive €400bn bailout package for Italy. The fund has denied the story, which appeared in the Italian press.
Using the European Central Bank (ECB) as a "bazooka" to print money and buy back debt is still the preferred option of the market, but the German government's resistance to that measure seems to have kept that off the table at Tuesday's meeting of the eurozone's finance ministers, known as the Eurogroup. Germany is reluctant to increase the inflationary pressures on the continent by increasing the money supply, and does not want to continue to pump money into failing economies without measures to enforce fiscal discipline.
At the Eurogroup meeting, Greece was finally given an €8bn tranche of loans from its €110bn 2009 bailout, after its fractious politicians finally agreed to an austerity and reform package. Ireland was also given an €8.5bn bailout deal, with €500,000 coming from the UK.
However, yields on Italian 10-year bonds remain firmly in the 'danger zone' - well above the 7% that has come to be regarded by the market as the upper bound of sustainability. Eurozone finance ministers warned on Tuesday that the country's liquidity crisis risked turning into a solvency one, which would push the country far closer to a default.
Brian Lawson, chief global economist at forecasting firm Exclusive Analysis, said that the risk of the paralysing brinkmanship at the upper echelons of European politics could lead to a break up of the euro "by accident, not by design."
"Our view is that there is quite a significant risk that this fails and the eurozone breaks up," Lawson said.
Hopes that the increasingly rich Bric countries - Brazil, Russia, India and China - would step in to help fund the EFSF have proved unfounded.
"Our sources suggest that there is no willingness on the part of the Brics to make any sizeable contribution to the EFSF," Lawson said. "They're not in the business of rescuing Europe. What they might do - and this is a long way off happening - is contribute more money to the IMF if asked very nicely to do so. But there would be a political price for that."
This leaves the ECB the only credible mechanism to shore up the collapsing peripheral debt markets in the short term. Domestic politics in Germany mean that the chancellor cannot be seen to too easily open up the purse strings for their fiscally irresponsible Southern neighbours, but in an absolute emergency, they may act to save the euro by relaxing their stance.
"In an absolute emergency, in extremis, is it possible to have recourse to the ECB in the short term? Possibly," Lawson said.
However, he added, the risk of an accident caused by the inflexibility of the various countries' positions, and the game of brinkmanship, is high.
"When you look at the stepwise way that Europe has progressed in the past 12 months, the cost of taking one more measure is much less than the cost of actually allowing the whole thing to topple," he said. "The problem is that we're playing brinkmanship, and it's a very dangerous game to play. It is possible that at a given point in time that Mr Draghi isn't able to act fast enough and Italy is unable to sell a series of auctions or Spain is unable to sell a series of auctions. There's almost a danger that this falls apart by accident, rather than by design."
The world economy is in a dangerous place. The Organisation for Economic Cooperation and Development (OECD) said that the eurozone and UK were now likely to fall back into recession. The group also warned that the effects on the world economy, should the single currency collapse, would be 'devastating'. Conditions in other developing economies are also increasingly concerning.
Fitch Ratings revised its outlook on the US' AAA credit rating to negative on Monday, saying that it is losing confidence in the government's ability to put its finances on a more sustainable footing. A number of global banks - including Morgan Stanley, Citigroup, Bank of America and Goldman Sachs - also had their ratings cut on Tuesday night. Japan's finances are also under close market scrutiny as questions rise over its debt dynamics.