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Euro zone finance ministers to discuss changes to rescue fund

Source: Reuters - Sun 16th Jan 2011

Euro zone finance ministers will discuss Monday an increase in the effective lending capacity of the euro zone rescue fund, to draw a line under the sovereign debt crisis before more countries need help.

The rescue fund, the European Financial Stability Facility (EFSF), can borrow money on the market with euro zone government guarantees of up to 440 billion euros.

But because it wants to have a triple A credit rating, the effective amount it can lend to countries in need is only around 250 billion. A potential bid for help from Portugal and Spain would stretch its resources to the limit.

The European Commission and the European Central Bank called last week for boosting the effective capacity of the EFSF as well as expanding its scope of operations. Germany, the biggest euro zone economy, is key to any agreement on changes.

German Finance Minister Wolfgang Schaeuble Germany, signaled readiness to raise the effective capacity of the EFSF.

"We have to and will solve this problem," Schaeuble was cited as saying in the Frankfurter Allgemeine Sonntagszeitung. Also France appeared open to talks on an increase in the fund's lending capacity.

But senior European sources told Reuters the sense of urgency in Berlin for boosting the fund had diminished after successful bond auctions last week in Spain and Portugal, the two countries seen most at risk of a bailout following rescues of Greece and Ireland last year.

Instead Germany is pushing for broader anti-crisis measures to be agreed at a summit of European Union leaders in March.

German Chancellor Angela Merkel said Saturday any further measures to stabilize the euro could only be introduced within a complete strategic package also aiming for stronger economic coordination.

She said new measures to tackle the euro zone debt crisis should be well thought-out and "you cannot simply raise another particular aspect each day."

"If the discussion is about a further package of measures, it is above all important that we develop a complete strategy that must absolutely include closer economic coordination," Merkel told a news conference in Mainz after a meeting with other senior members of her ruling Christian Democrats.

Among the contentious issues, officials say, are France's wish to let the EFSF buy the bonds of vulnerable euro members which Germany does not want, and Berlin's insistence that other members of the currency bloc be forced to introduce legislation similar to the "debt brake" rule it adopted in 2009.

Germany is also against lowering the punitive interest rate the EFSF charges states for its loans, a step other euro zone members believe is necessary to allow struggling economies in the bloc to reduce their debt mountains.

If the margin, now 300 basis points, were to be lowered for the EFSF, it would most likely also fall for loans already agreed on for Ireland, as well as for Greece.

"The principle is to have similar conditions across instruments and countries," a euro zone source said.

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