NEGOTIATIONS are under way to create a huge so-called financial 'bazooka' to finally end the European debt crisis with the plans to be presented at this Friday's crunch EU summit.
The latest plan would involve running two separate rescue funds, effectively doubling the firepower available to fight crises that break out over the next few years. The IMF may also provide increased support to Europe under the plans being hammered out last night.
The €440bn European Financial Stability Fund (EFSF) would be allowed to continue, even after a new fund - the European Stability Mechanism - comes into force in mid 2012, under the plans being discussed.
Running two funds simultaneously, along with IMF support, would be in addition to European treaty changes that are already on the table since a meeting in Paris on Monday between France and Germany.
Countries who will be asked to contribute to the two funds may not accept the changes, and discussions are expected to continue ahead of Friday's meetings.
The new plan emerged after Standard & Poor's (S&P) added further fuel to the European debt crisis with a threat to cut the credit rating of the current EFSF.
Last night, the US administration piled on the pressure to find a solution. Treasury secretary Timothy Geithner backed French and German calls for greater fiscal union, on the first day of his whistle stop tour of eurozone policy makers.
It came after S&P said it is considering downgrading the top 'AAA' rating it gives to the main tool in the current bailout kit, the European Financial Stability Facility (EFSF).
Euro leaders set up the EFSF last year, to borrow cheaply in the market to raise loans for Ireland and other countries locked out of the markets. A rating cut would increase its borrowing costs, and extra costs would be passed onto the countries like Ireland than depend on its loans.
S&P made its latest intervention just a day after warning that all eurozone countries could have their ratings cut if a deal to end the crisis is not agreed later this week.
Even Germany risks losing it coveted 'AAA' borrower rating if the situation continues to drift, the agency said.
The news undid some of the positive effects on the markets from the announcement by German chancellor Angela Merkel and French president Sarkozy of their plans for greater European fiscal union was made earlier on Monday.
Borrowing costs for Italy and Spain rose yesterday after falling sharply on Monday, when the Franco-German proposals were unveiled.
As markets soured, S&P was lambasted by some policy makers, for what they saw as interference in the political debate.
Jean-Claude Juncker, the prime minister of Luxembourg and chairman of the Eurogroup, called Monday's S&P move "a wild exaggeration," and said it was "unfair."
The German chancellor, however, dismissed the importance of the S&P report. "What a rating agency does is its own responsibility," she said.
Her finance minister, Wolfgang Schauble, even said it could encourage European leaders to make the right decisions in Brussels. Last night, S&P made an effort to repair the damage. Its senior government debt expert, Frank Gil, said measures put forward by France and Germany on Monday look promising.
He said rating agencies will see Friday's summit as a success if leaders came up with "some indication" that they have a strategy to restart economic growth, and share bailout costs.
Political leaders are expected to unite behind proposals for closer financial union, especially inside the eurozone, at the Brussels summit.