Euro zone finance ministers will raise the combined firepower of the region's two bailout funds to a potential 783.78 billion pounds (940 billion euros) from 500 billion euros on Friday, a draft statement showed.
They will boost the EFSF/ESM safety net to at least 700 billion euros and pledge an extra 240 billion if required that could be used until mid-2013, according to the statement obtained by Reuters.
The likely decision, to be announced by the 17 ministers on Friday after a meeting in Copenhagen, is a compromise between Germany's reluctance to pledge more money for euro zone bailouts and the need to reassure markets that money invested in euro zone bonds is safe.
Increasing the euro zone's financial safety net is a pre-condition for most countries from the G20 group of the biggest developed and developing economies to contribute more money to the International Monetary Fund, to further calm markets.
The European Commission and several of the world's biggest economies have been pushing to increase the bailout capacity as much as possible, in the belief that once investors see a wall of money supporting euro zone debt, confidence would return and the rescue funds would never have to be used.
But Germany, the euro zone's dominant economy, has been against increasing the bailout capability in advance, saying it was ready to give more money when needed and noting markets have calmed down from the peak of the debt crisis.
But recent market concerns about Spain, which badly missed its budget deficit target in 2011 and negotiated a softer target for 2012 with euro zone ministers, have sent the country's bond yields higher and put the bailout capability discussion back on the table.
The draft statement said that if any new bailouts were to be necessary from July they would be handled, as a rule, by the permanent European Stability Mechanism (ESM) which will can lend up to 500 billion euros to euro zone governments cut off from markets.
Its precursor, the temporary European Financial Stability Facility (EFSF), which can lend up to 440 billion, would only service the three bailouts it is already committed to -- for Greece, Ireland and Portugal -- which now together total almost 200 billion euros.
Together, the ESM and the existing EFSF programmes would therefore create a firewall of 700 billion euros.
POSSIBILITY OF BIGGER FIREWALL FOR ONE YEAR
But if the 700 billion were to prove insufficient to finance bailouts in the period between July 2012 and July 2013, euro zone leaders can agree to raise that amount by the yet uncommitted lending capability of the EFSF -- 240 billion euros.
Until mid-2013, it (the EFSF) may engage in new programmes in exceptional circumstances following a unanimous decision of euro area heads of state or government notably in case the ESM capacity would prove insufficient, the draft said.
The current overall ceiling for ESM/EFSF lending will be raised such that the ESM and the EFSF will be able to operate, if needed, as described above, at their full capacity for the period during which the EFSF remains available, i.e. until mid-2013. the draft said.
As of mid-2013, the maximum lending volume of ESM will be EUR 500 billion. In the absence of new EFSF programme, the combined lending ceiling of the ESM and the EFSF will thus be set at EUR 700 billion for the period after mid-2013.
The ESM's capacity will be based on 80 billion euros of paid-in capital and 620 billion euros of callable capital. The initial agreement was that the paid-in capital would be provided over five years.
To help the ESM reach full capacity sooner, euro zone leaders agreed to pay in the money over four years, with the first two tranches delivered already in 2012.
The draft statement said there would be a further acceleration of the payments, with two tranches paid in 2012, another two in 2013 and the fifth in 2014.
This would give the ESM an initial lending capacity of 200 billion euros in 2012, 400 billion in 2013 and the full 500 in 2014. Euro zone officials note however, that should the ESM need its full lending capacity earlier, the capital can be raised quickly.
The ministers are also to say that they will continue to review the adequacy of the ESM capital as appropriate and in particular when used EFSF guarantees are freed once financial assistance is repaid.
(Reporting by Jan Strupczewski; Editing by John Stonestreet)