€440 billion bail out fund actually has less than €3.5 billion

Compiled by Denis Cooper, lengthy but worth a read:
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The EFSF "bail-out fund" does not actually have anything like the €440 billion which the media keep describing as its "firepower", its "reserves" or its "funds" as Robert Peston pretends here.

The EFSF operates by borrowing money and lending it on. Its subscribed share capital was minimal - less than €29 million, and I do mean million not billion, as can be checked on page 4 of the Articles of Incorporation.

So far it has borrowed a total of €13 billion through three bond issues (you may have to go click 'I agree' to get to that screen) and it has disbursed a total of €9.5 billion to Portugal and Ireland, on which basis it will presently have less than €3.5 billion to hand.

It's not an EU body; in fact it's a Special Purpose Vehicle, a private company, as explained in here

A1 - What is the EFSF?

The European Financial Stability Facility (EFSF) is a company which was agreed by the countries that share the euro on May 9th 2010 and incorporated in Luxembourg under Luxembourgish law on June 7th 2010. The EFSF’s objective is to preserve financial stability of Europe’s monetary union by providing temporary financial assistance to euro area Member States if needed.

On June 24, the Head of Government and State agreed to increase EFSF’s scope of activity and increase its guarantee commitments from €440 billion to €780 billion which corresponds to a lending capacity of €440 billion and on July 21, the Heads of Government and State agreed to further increase EFSF’s scope of activity.

Describing the EFSF as SPV1, one of the two options being considered is to set up a second SPV, call it SPV2, as explained in this official factsheet.

Under this model, a special purpose vehicle (SPV) would be created centrally or in the beneficiary member state, combining public and private capital and funding for extending loans for bank recapitalisation (via a Member State) and/or for buying bonds in the primary and secondary market.

The SPV structure would be set up so as to attract a broad class of international public and private investors with different risk/return appetites. The EFSF would provide the equity tranche of the vehicle and hence absorb the first proportion of losses incurred by the vehicle.

So SPV2 would also operate by borrowing money with SPV1 in effect indemnifying those "international public and private investors" against losses if SPV2 loses money on its business of "extending loans for bank recapitalisation ... and/or for buying bonds in the primary and secondary market", but with SPV1 only indemnifying the SPV2 investors for consequential losses on their investments up to maybe 20%.

As investors are already becoming wary of the bonds issued by SPV1, when it has only borrowed €13 billion so far - which have lost between 3% and 5% in value as at a couple weeks ago - how likely is that they'll believe that if they lent SPV2 say €1 trillion to keep Italy, Spain etc afloat, and if/when that bail-out attempt failed SPV2 suffered losses of say €200 billion, nevertheless SPV1 could then borrow €200 billion from investors to make sure that the SPV2 investors were paid on time and in full?

And given the 50% losses on Greek bonds, how likely is it that under those circumstances the losses incurred by SPV2 would exceed the 20% guaranteed by SPV1, even if it could borrow enough to meet that guarantee? On the whole I think I'll keep my money in the building society, rather than investing any of it in either SPV1 or SPV2.