Euro zone decision on size of bailout fund seen delayed
* Germany unlikely to be ready to decide at March 1-2 summit
* Euro zone may decide on combined bailout fund later in March
* No increase of IMF funds without Europe moving first
By Jan Strupczewski and Daniel Flynn
MEXICO CITY, Feb 25 (Reuters) - Euro zone leaders may not be able to meet international demands to ramp up their own funds for bailing out the bloc's debtors when they meet next week because Germany is showing no sign of dropping its opposition to the plan, euro zone officials said.
A bigger European fund is a condition for major non-European economies before they lend more money to the International Monetary Fund to provide an even bigger wall of cash to fight the crisis that has already claimed three euro debtor countries and now threatens the much bigger economies of Italy and Spain.
"I would not bet on a positive outcome by the end of the March 1-2 summit," one euro zone official said. "German opposition to a deal is still very strong."
Euro zone leaders are set to review the 500 billion euro ($675 billion) limit on the joint lending capacity of their temporary and permanent bailout funds, known by their acronyms EFSF and ESM, at the March 1-2 summit.
If they decide to merge the funds, they would create a firewall of 750 billion euros which would help convince markets that they were committed to bringing the crisis under control.
The European Central Bank supports such an increase as do policymakers around the world who are considering more than doubling the IMF's resources by $600 billion.
"Everybody says there is a pre-condition that Europe makes more efforts first," South Korea's central bank governor Kim Choong-soo said before a meeting of finance ministers and central bankers of Group of 20 leading economies in Mexico City.
But Germany, the euro zone's biggest economy, insists Europe's current bailout arrangements are more than sufficient and that increasing them would send a signal to markets that the euro zone it expects more trouble ahead.
German officials say countries would lose the impetus to carry out badly needed belt-tightening reforms.
"It makes no sense, and is rather harmful," said one German official.
Others in Berlin argue the extra obligations under the combined bailout funds could increase the risk of further credit rating downgrades for some euro zone countries. And the sense of urgency is dissipating because Italy and Spain are paying less to borrow on markets.
Officials from other countries warn that argument is premature.
"The current improvement in markets is very fragile, so we need to be careful not become complacent," a second euro zone official said.
"Most euro zone countries are ready to move now, but I am afraid that Germany will need more time to agree to the increase, mainly to be able to better manage the Bundestag," the official said.
The country's parliament is due to vote on Monday on the agreement to provide Greece with a new financial lifeline, agreed earlier this month despite much opposition from German taxpayers.
A draft set of conclusions prepared ahead of next week's summit showed that euro zone leaders will call for an international deal to increase IMF resources in April, implying a deal within the euro zone on its bailout funds in March. Yet this was unlikely to come as soon as next week, officials said.
"What we can expect, at most, is a reference in the conclusions suggesting Germany is not closing the door," one senior euro zone official said.
The United States has said it will not participate in any IMF funding boost. Canada is reluctant too, unless the euro zone makes a bigger effort. That leaves China and Japan as the two biggest candidates for increasing IMF resources through bilateral loans.
One G20 official said there were hopes that China, the world's second-biggest economy, could contribute some $100 billion to the IMF and Japan another $50 billion.
Both countries said last Sunday that the euro zone must move first. Three euro zone officials said a decision on the size of the euro zone bailout funds could be taken after next week's summit, but still during March.
One of the officials said: "The leaders said they would review the adequacy of the funds' resources in March. March 1-2 is just the first opportunity."
Another of the officials said Germany first wanted to see the outcome of Greece's debt swap which Athens wants to conclude by March 12 when euro zone finance ministers are due to meet.
"From this point, we believe there is a small window of opportunity to get a deal done, before the IMF board meeting in mid-March," one of the euro zone officials said.
An extra euro zone summit after March 12 may be necessary to approve the changes to the ESM and EFSF. But this would still allow time for the April increase of IMF resources to take place, a fourth euro zone official said.
A key factor for Berlin may be the level of opposition or support for the Greek rescue plan over the following two days not only in Germany's parliament on Monday, but also in the Netherlands and Finland. The three countries have all retained their top AAA credit rating and led demands for austerity in debtor countries.
"Our view is that an informal agreement between a few key euro zone countries could be enough for IMF Managing Director Christine Lagarde to go to the IMF board and ask for increased commitments for Europe," the official said.
For Germany, rather than quickly combining the temporary and permanent funds, one of the options could be to allow the permanent European Stability Mechanism to reach its full capacity of 500 billion euros more quickly than over five years from July 2012, as envisaged now.
Germany would be ready to pay its contribution to the ESM's 80 billion-euro paid-in capital more quickly than in five tranches or even make all its payments in two steps, officials said. But not all euro zone countries are ready to follow.
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