Euro zone finance ministers are likely to consider next week the option of raising the effective lending capacity of the euro zone rescue fund as part of efforts to calm sovereign debt markets, euro zone sources said.
The possibility of boosting the actual capacity of the European Financial Stablity Facility (EFSF) to a full 440 billion euros, from around 250 billion now, could be part of
moves aimed at boosting market confidence in the euro zone.
I think this increase of the capacity of the EFSF is something that will definitely be on the table next week, said one euro zone source with knowledge of the preparations for the meeting of euro zone finance ministers on Monday.
It is basically about getting the whole 440 billion into operation, the source said. I think it will at least be given serious consideration next week.
A second euro zone source confirmed that such a possibility had been discussed during a preparatory meeting for the ministers' meeting, although no decisions were taken and none were expected until next week.
There is no decision on anything specific yet. This is matter for ministers, the second source said.
Economists have indicated a more substantial increase in the rescue funds, to 1-2 trillion euros from the current 750 billion, would be needed to calm investors.
Markets are concerned that the euro zone may not have enough cash at the ready to support countries like Spain or Belgium if Portugal follows Ireland in asking for financial help and others are forced to do so too.
But a more substantial increase in the funds available to the EFSF seemed unlikely now.
Doubling or tripling the EFSF will not be seriously considered at this stage -- for a number of member states the limit is the 440 billion that has been agreed last May and it would be a fundamental step forward to discuss something more, the first source said.
Euro zone governments agreed in May to guarantee the issuance of the EFSF, which raises money to help governments frozen out of the market, up to 440 billion euros.
To secure a triple A rating for bonds issued by the special purpose vehicle, euro zone governments that are not frozen out guarantee the bonds issued by the EFSF in a 120 percent proportion of their share in the European Central Bank's capital.
We are talking about more or less doubling the guarantees to get the full 440 billion, maybe it would be sufficient to increase them less, but we don't want to err on the small side, the source said.
Euro zone sources said further adjustments to the EFSF could include lowering the penalty margin charged on EFSF loans to the frozen out countries from the current 300 basis points and lowering the cash buffers.
Ireland was the first country to apply for money from the EFSF and its experience of the program could form the basis for a review of the mechanism.
We now have the first experience of the EFSF with Ireland ...so it is possible that a number of things could be adjusted at the same time, the source said.
It might not only be the effective capacity but also the margin, cash reserves, etc. -- it could be a readjustment of the EFSF after the first experience, the source said.
A third source said the euro zone finance ministers' discussions on Monday would to a large extent be determined by the outcome of euro zone bond auctions this week, especially Portugal's on Wednesday.
Market players are anticipating that rising costs of market funding will force Portugal to apply for euro zone and International Monetary Fund help soon.
In the case of Portugal it depends very much on how it goes at the bond auction tomorrow; Portugal is a worry for us, but we will see how it goes, the third euro zone source said.
This will be an issue for discussion on Monday -- what to do -- but it will depend on how the situation develops on a day-by-day basis, the source said.
The source said there have been so far no talks on a Portuguese bailout, at least not in a structured way.
(Reporting by Jan Strupczewski; Editing by Ruth Pitchford)