The eurozone bailout fund is in danger of losing its triple-A rating after countries backing it were downgraded, complicating efforts to shield big nations like Italy from the debt crisis.
Governments were already struggling to boost the firepower of the European Financial Stability Facility (EFSF) before Standard and Poor's decided to cut the ratings of nine eurozone nations including top-rated Austria and France.
S&P, which indicated in December that any downgrade of a triple-A nation could lead to similar action against the EFSF's stellar rating, slashed the credit scores of France and Austria by one notch to AA+.
"Now there is a risk that the EFSF will lose its triple A," said a European government source.
"It's a real problem," the source said, noting that France contributes to one-fifth of the fund.
Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of eurozone finance ministers, said governments will strive to protect the EFSF's AAA rating.
"The shareholders of the EFSF affirm their determination to explore the options for maintaining the EFSF's AAA rating," he said in a statement after the S&P announcement.
The EFSF is backed by guarantees from eurozone states, allowing the fund to borrow money from investors at cheap rates and then lend that money to nations that have been shut out of the private markets.
A credit score downgrade would likely raise the interest rate demanded by investors to buy bonds issued by the EFSF, in turn making it more expensive for eurozone states to help each other out.
The EFSF had a lending capacity of 440 billion euros when it was created, but the figure is now down to 250 billion euros following bailouts of Ireland and Portugal.
The fund is now considered too small to come to the aid of bigger countries like Italy or Spain, the eurozone's third and fourth biggest economies, whose borrowing costs have spiked in recent months.
Greece, which received a 110-billion-euro EU-IMF bailout before the EFSF was founded in May 2010, is hoping to secure a second 130-billion-euro rescue package from the eurozone.
With more bailouts a growing possibility, EU leaders had hoped last year to leverage the EFSF to one trillion euros by using clever financial footwork.
Governments widened the scope of the EFSF by allowing it to act as an insurance policy by promising to guarantee 20 to 30 percent of loans made to fragile nations.
The aim was to convince private investors and emerging powers such as China to contribute to the fund, but the eurozone has failed to attract much interest so far.
European leaders have decided to bring forward the introduction of the EFSF's successor, the European Stability Mechanism (ESM), to July 2012.
The ESM will have a firepower of 500 billion euros, but Juncker said the eurozone will reassess "the adequacy" of its capacity by March.
EU Economic Affairs Commissioner Olli Rehn, who criticised the S&P decision as "inconsistent," called for the financial firewalls to be reinforced "both in the scope of their activities ... and in (their) firepower."
Juncker added that the next bailout fund will be less vulnerable to downgrades of member states that back it because it will have its own capital base.
