Euro zone leaders will likely agree to boost the International Monetary Fund's lending capacity with 150 billion euros (127.9 billion pounds) and bring forward the launch of the ESM permanent bailout fund in efforts to end a debt crisis, a senior euro zone source said.
Speaking hours before a European Union summit aimed at showing the bloc can get the spiralling debt crisis under control, the source said the IMF money would come via bilateral loans from national central banks in the 17 euro states.
The money is intended to boost the IMF's firepower to make sure it has sufficient funds to help the euro zone, where the costs of borrowing for Spain and Italy have risen sharply on market concerns about their ability to service their debts.
National central bank lending to the IMF would sidestep the fact that the European Central Bank is not allowed under its mandate to finance euro zone government deficits. It remains unclear, however, to what extent the IMF could, or would want to be involved in any future rescues.
There is likely to be agreement to increase IMF resources through bilateral loans of about 150 billion euros from euro zone national central banks, the official said of a possible outcome from the summit on Thursday and Friday.
He said euro zone officials hoped the euro zone money would be complemented by, for example, another 50 billion euros from non-euro zone countries, taking the total amount of extra cash for the IMF to 200 billion euros.
But there was no definitive declaration yet on the extra contribution from non-euro zone countries, which wanted to see the euro zone money first, the official said.
A second official said the increase in the IMF funds could be done over the next 2-3 months.
ESM BECOMING A BANK OFF THE TABLE
Euro zone leaders were also likely to announce they would move forward the launch date of the euro zone's permanent bailout fund, the European Stability Mechanism (ESM), to 2012 from the initially planned mid-2013, the official said.
There seems to be consensus that it will enter into force earlier. Following the process of ratification, in the summer of 2012, the official said.
The ESM is to have total lending capacity of 500 billion euros, thanks to 80 billion euros of paid-in capital from euro zone countries and 620 billion euros of callable capital.
Euro zone officials said discussions were still going on whether to remove the combined lending limit of 500 billion euros, which had been set on the ESM and the European Financial Stability Facility (EFSF), the temporary fund now in operation.
The official said leaders could agree to a review clause in the ESM treaty, saying they would decide on the final capacity when the ESM becomes operational.
Another issue to be sorted out is the fact that the 80 billion euros of ESM capital had been agreed to be paid in over 5 years -- which could leave the ESM with lower lending capacity to start with. That in turn could mean the whole euro zone bailout capacity would be lower than now.
Euro zone officials said a proposal to give the ESM a banking licence -- which could allow it to access European Central Bank funds, boosting its firepower -- had been rejected.
The idea of giving the ESM a banking licence is off the table, the first official said of an idea floated by EU Council President Herman Van Rompuy, backed by France but opposed by Germany.
The official said the treaty on the ESM, which has been agreed but not yet been ratified, would be changed to stress that private sector involvement (PSI) in any restructuring of euro zone sovereign debt would follow IMF procedures.
We are not giving up the PSI, but saying it could happen in exceptional cases, strictly along IMF rules, the official said.
The source was confident an agreement would be found on how the bloc's Lisbon treaty could be adapted to better tackle the debt crisis, but said the exact text of those changes would be agreed later and finalised by a March summit.
(Reporting by Jan Strupczewski; editing by Mark John and Rex Merrifield)