The trouble is that the ESM was conceived (late in 2010) when European leaders believed that at the time of its launch (originally scheduled for 2014) the worst of the sovereign crisis would be behind them. There are two things that have conspired to thwart this. First and most simply, the chain of events in the eurozone (and elsewhere) that has seen the crisis worsen rather than improve. Second, the bringing-forward of the ESM launch to year earlier than originally planned.

As such, the supposedly new and improved lifeboat is set to be launched in the midst of the storm that was expected to be over when it was first mooted. Unfortunately, there is a real danger that rather than serving to save the eurozone, it may hasten its demise. At present, there are four countries signed up for financial assistance from the troika (EU, ECB and IMF) in various forms, including Spain’s yet to be agreed bank loan program. Spain itself will struggle to survive at current market rates, especially given the rising debt burden from the bank deal. All these countries must still contribute to the capital of the ESM. The only provision allowing for leniency relates to those with per capita GDP 75% or less of the European Union average, but only applies to new ESM members (i.e. accession countries).

But if Spain were to be formally ‘bailed out’, then there would be four countries whose capital contributions to the ESM (payable by instalment over the next five years) would still have to be paid. Without direct market access, these would be indirectly paid by the ESM, unless the IMF was to take a greater role. In other words, the contributions would feature in its funding requirements and (ESM) loan calculations for the coming years.

The point is that beyond the debate about the size of the ESM (with regards to providing a backstop for the likes of Italy), there is a real need for a look at the structure which was designed for when the waters had calmed, not whilst the storm is still blowing. At present, it’s a house of cards and the more Germany digs its heels in on the austerity and ‘no bail-out’ mantra, it are merely making bigger waves that could sink the whole ship as the paid-in capital is funded by bigger claims on the ESM itself. It’s a potential vortex of lending to finance more borrowing, a route which can only lead to a credit crunch of epic proportions.