The European Commission presented plans for fundamental treaty changes that will extend the current aid mechanism – the European Financial Stability Facility – beyond its 2013 sunset provision.
Details of the proposal will be debated by European leaders at their next EU summit on 16-17 December.
The changes, which have been rumoured in financial markets for weeks, would increase risk for sovereign investors. Under the proposal, bonds issued after June 2013 would include a provision to allow creditors to renegotiate new terms if the country is on the brink of insolvency.
The new clause would enable creditors to vote by qualified majority to agree changes to the terms of payment. That means some bondholders may be forced to take a loss on their investments.
Investor involvement would be decided on a case-by-case basis in line with practices of the International Monetary Fund, according to the Commission.
The changes, drafted by Council President Herman Van Rompuy, were endorsed on 28 November by the finance ministers of the 16 countries that use the euro currency. The agreement went hand-in-hand with the €85 billion rescue package for Ireland and was designed to help stem the contagion from spreading to other countries, such as Portugal, Spain and Belgium.
But that does not mean there will be unanimous support among Council members. The framework for a permanent strategy, crafted by German and French leaders in October, has already drawn fire from some member states and unsettled bond markets.
German Chancellor Angela Merkel, for example, wants to suspend voting rights for countries that seriously violate the principles of Economic and Monetary Union. That is unlikely to find support in countries with the weakest financial positions.
At the same time, a challenge to the legality of the eurozone rescue fund is being considered by the German Constitutional Court.
