The possibility of boosting the actual capacity of the European Financial Stability Facility (EFSF) to a full €440 billion, from around €250 billion now, could be part of moves aimed at boosting market confidence.
"I think this increase of the capacity of the EFSF is something that will definitely be on the table next week," said one source with knowledge of the preparations for the meeting of eurozone finance ministers on 17 January.
"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."
Writing in a Financial Times column, EU economics chief Olli Rehn argued that the lending capacity of the euro zone's financial rescue fund should be reinforced and the scope of its activity widened.
"We need to review all options for the size and scope of our financial backstops -- not only for the current ones but also for the permanent European stability mechanism too," EU Monetary Affairs Commissioner Rehn wrote.
Economists have indicated that a more substantial increase in rescue funds would be needed to calm investors: to €1-2 trillion from the current 750 billion available jointly through the euro zone and the International Monetary Fund.
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 source said.
EFSF guarantees
Eurozone governments agreed in May to guarantee the EFSF, which raises money to help governments frozen out of the markets, up to 440 billion euros.
To secure a triple A rating for bonds issued by the special purpose vehicle, eurozone governments that are not frozen out guarantee the bonds issued by the EFSF in a 120% 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.
But another eurozone source said that doubling the guarantees would not be realistic, even though some countries were in favour of doubling or even tripling them.
Germany, Slovakia, the Netherlands or Finland could find it difficult to push such a change through their parliaments, especially given that they will soon have to deal with a change in the EU treaty to accommodate the European Stability Mechanism that is to manage any future eurozone debt crises after mid-2013.
"You cannot approach parliaments every couple of weeks with matters like that. There would be a big risk of failure," the source said.
EFSF review
Eurozone 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 programme 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 first 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.
No formal talk of Portugal bailout yet
EU sources noted that eurozone finance ministers' discussions on 17 January would to a large extent be determined by the outcome of eurozone bond auctions this week, especially Portugal's today (12 January).
Market players are anticipating that rising costs of market funding will force Portugal to apply for eurozone 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," an EU source said, adding it would be an issue for discussion next week.
Reportedly, sources confirmed that there have been so far no talks on a Portuguese bailout, "at least not in a structured way".
Portugal will auction up to 1.25 billion euros of 10-year and five-year bonds today. The yield on the former was above 7% on the secondary market on Tuesday.
"If the yield will be [at the auction] significantly above 7%, they will go ahead [and ask for EU/IMF aid]," the third source said.
(EurActiv with Reuters.)
