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Europe Bailout Fund 'Subprime SIV Program': Strategist

As the enlargement of the European Financial Stability Facility (EFSF) draws nearer, opinion is still divided on whether changes to the bailout fund will be enough to stench the flood of problems facing the eurozone.

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"There are very powerful forces pushing for those solutions, even though it's nothing but a subprime SIV program," Sean Corrigan, chief investment strategist, Diapason Commodities Management, told CNBC Monday, referring to the structured investment vehicles that US banks formed from bundled subprime mortgages, helping to precipitate the banking and housing crisis in that country. "This is what brought the US to a halt and now we are bringing it to Europe."

The EFSF, which is managed by the European Investment Bank, raises money to help out struggling eurozone countries by issuing debt. The measures currently under debate would raise the size of the fund to 440 billion euros ($587 billion) from 250 billion euros ($334 billion) currently.

"Politicians are basically trying to build these firewalls so that if it goes wrong they won't have a bigger problem," Erik Nielsen, global chief economist, UniCredit, told CNBC.

"In the US and UK we knew that the central bank would underwrite the sovereign, but in the eurozone we are not quite sure whether the ECB is standing behind all the sovereigns or only some of them."

The problems in Greece, currently viewed as the eurozone nation most likely to default on its debt repayments, were highlighted after an emergency cabinet meeting on Sunday resulted in plans for increased cuts and public sector job losses in the country, which will be submitted to the parliament for approval today. The government also announced that it will miss its 2011 deficit target of 7.6 percent of gross domestic product.

The expansion of the EFSF was partly in response to the problems in Greece and worries about problems elsewhere in the euro zone.

The prospect of greater fiscal union of the countries in the euro region, and a jointly-issued Eurobond, look more likely after the crisis, with high-profile politicians calling for greater integration.

"This also a case of never waste a good crisis," said Corrigan. "The EFSF is a back door transfer to fiscal union. It's trying to get these famous Eurobonds into the market through the back door and above objections of local politicians and people concerned about local sovereignty and accountability."

"We need to say to banks: 'Raise capital in the private markets. If you are stuck, there may be some national government support,'" he said. "The rescue so far has been harmless for bankers, particularly senior bankers, who were responsible for the laxity of the last 10 years."

Nielsen thinks the chance of Greece defaulting is slimmer than the market is pricing in, and that the EFSF will "almost certainly" be approved.

"The bigger numbers and leverage is to put firewalls up," he said, "so that contagion doesn't spread to Italy and Spain."