- 17Jan
(Reuters) - Euro zone finance ministers on Monday will discuss an increase in the effective lending capacity of the euro zone rescue fund, but France said it would be March before a firm plan was in place.
Growing realization that a deal on the bailout fund was not imminent helped the euro fall broadly Monday, retreating from a one-month high reached after successful debt auctions by Portugal and Spain last week.Dealers said further gains in the currency may depend on the outcome of the talks in Brussels, which are aimed at drawing a line under the sovereign debt crisis before more countries need help.
"The ministers will talk tonight about how to increase the effective capacity of the EFSF close to 440 billion, but no final decision is likely," one euro zone source said Monday.
The European Commission and the European Central Bank called last week for the region to boost the effective capacity of the rescue fund -- the European Financial Stability Facility -- as well as expanding its scope of operations.
ECB President Jean-Claude Trichet reiterated the central bank' view on the eve of the meeting in Brussels.
"This fund, taken as it stands at the moment we speak, needs to be enhanced, qualitatively and quantitatively," he said on a French talk show.
By qualitative enhancement the ECB most likely means taking over the purchases of government bonds on the secondary market, now done by the central bank, ECB Governing Council member Athanasios Orphanides indicated.
If the EFSF "were to buy government bonds, and that improved the functioning of the monetary policy transmission mechanism, that might render some of the ECB's non-standard measures no longer necessary," Orphanides told Bloomberg in an interview.
RAISING EFFECTIVE LENDING CAPACITY
The fund can borrow money on markets 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.
Germany, the biggest euro zone economy, is key to any agreement on changes. France appeared open to talks on an increase in the fund's lending capacity.
"It needs to be replaced and reinforced. We have started talks...and agree on the big principles, we are looking at how it could be applied," French Economy Minister Christine Lagarde told French radio Monday.
Facing a volatile market as it looks for ways to keep its debt costs under control, Spain's Treasury canceled a bond auction planned for Thursday and said it would issue a syndicated bond over 10 years.
Belgium is also seeking an opportunity to place debt with a syndicate of banks and Portugal also plans one for the first quarter, as fiscally stretched sovereign issuers elsewhere in Europe also seek to cut spiraling financing costs.
Risks premiums on Spanish and Portuguese debt widened and one analyst said Spain's announcement could add a new layer of uncertainty to an already tense debt market.
LESS URGENCY
Still, senior European sources told Reuters that Berlin's sense of urgency for boosting the fund had diminished after successful bond auctions last week in Spain and Portugal, the two countries seen most at risk of following Greece and Ireland in seeking a financial bailout.
Instead, Germany is pushing for broader anti-crisis measures to be agreed at a summit of European Union leaders in March and Lagarde expressed similar views Monday.
"We can't have a little hike here and some flexibility there, a reinforcement of discipline. We will need a complete package and I hope that we will submit one in March," she said.
"We are working in concert with Germany and I am working in tight collaboration with Finance Minister Wolfgang Schaeuble," she said. "I think, like him, that there is no point in making announcements bit by bit."
Schaeuble has indicated he was open to discussions on raising the effective lending capacity of the EFSF, but has also made clear he would not support an increase in the overall amount of the fund above the current 440 billion.
A euro zone source said the key problem for the increase of the effective lending capacity to the full 440 billion for Germany was how to achieve that without raising the amount of government guarantees -- a politically risky move.
"The rules agreed on remain in force and whoever wants to change them ... has to get the laws changed by the German Bundestag -- just as with the other national parliaments. This should be considered more often by those in charge in Brussels," Schaeuble told German radio.
DISAPPOINTMENT EXPECTED
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.
Economists noted progress in the debate, but said markets might be disappointed in terms of decisions.
"While some progress might be achieved at the EcoFin today, a formal and comprehensive deal is unlikely. The debate is progressing positively, with political leaders increasingly open to a change in strategy in order to stabilize markets once and for all," said Luigi Speranza, economist at BNP Paribas.
"Expect therefore some disappointment today. Chances of a less piecemeal approach to the fiscal issues in the euro zone, with a coherent and comprehensive framework, have increased over the past few weeks," Speranza said.
"But it will take more time for this to be delivered, probably until the March EU Summit. The path therefore won't be smooth," he said.
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