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* Euro zone likely to allow temporary boost of bailout capacity to 940 bln euros
* Bailout power to fall after mid-2013
By Jan Strupczewski and John O'Donnell
COPENHAGEN, March 30 (Reuters) - Euro zone finance ministers are likely to agree to temporarily almost double their financial backstops on Friday as one of the final moves to end the sovereign debt crisis, although Germany continues to favour a smaller increase.
The 17 countries sharing the euro have already agreed to adopt balanced-budget rules in an effort to convince markets that euro zone public finances would be sustainable.
They also agreed to slap fines on countries that run excessive budget deficits or have large imbalances in their economies.
After a deal with investors this month to restructure Greek debt, increasing the amount of money the euro zone can use to help its members cut off from markets is one of the last things policy-makers can do to boost investor confidence.
A draft statement by the ministers, obtained by Reuters , showed that in case of an emergency over the next 15 months, the euro zone could raise the combined firepower of its two bailout funds to 940 billion euros from 500 billion now.
But this could happen only if during that time there was a need for a new bailout for a euro zone country and the new, permanent bailout fund, called the European Stability Mechanism (ESM), would run out of money to finance it.
The ESM, which is to go on-line in July, will have 500 billion euros of lending capacity and the temporary European Financial Stability Facility (EFSF) has 440 billion euros, of which 200 billion is already earmarked for financing Greece, Ireland and Portugal.
According to the draft statement, the ministers are to agree to allow the EFSF to service its existing commitments on top of the full 500 billion euros of new money that would be provided by the ESM. The combined lending power of both funds is now capped at 500 billion euros.
Any potential new bailouts after July would be handled by the ESM. If it does not have enough money, the remaining 240 billion euros of yet uncommitted EFSF money could be used.
"The current overall ceiling for ESM/EFSF lending will be raised such that the ESM and the EFSF will be able to operate, if needed ... at their full capacity for the period during which the EFSF remains available, i.e. until mid-2013," it said.
But Wolfgang Schaeuble, finance minister for Germany where public opinion is strongly against more money for bailouts, said 800 billion euros in the euro zone rescue aid should be enough.
"We have 500 billion euros in fresh money available, together with the programmes already agreed for Ireland, Portugal and the new programme for Greece. It is about 800 billion (euros)," Schaeuble told a gathering at the University of Copenhagen a day before the ministerial meeting.
"I think it's enough," he said, deflecting recent calls for a financial reserve of up to 1 trillion euros that would impress investors. "To spend more money is not the solution," he said.
Schaeuble arrived at the 800 billion by adding not only the 500 billion from the ESM and the 200 billion of commitments from the EFSF, but also 60 billion euros, now largely already spent, at the disposal of the European Financial Stability Mechanism (EFSM)and 56 billion in bilateral euro zone loans to Greece.
The European Commission and several of the world's biggest economies have been pushing to increase the euro zone bailout capacity as much as possible, in the belief that once investors see a wall of money supporting euro zone debt, confidence would return and the rescue funds would never have to be used.
But Berlin has been against raising the bailout power in advance, saying it was ready to do so only if needed, and noting that markets have calmed down from the peak of the debt crisis.
Yet market concern about Spain, which badly missed its budget deficit target in 2011 and negotiated with the euro zone a softer target for 2012, have raised the country's bond yields and put the bailout capability discussion back on the table.
The likely decision to allow only a temporary increase of the bailout capacity to 940 billion euros will be a compromise between the need to reassure German taxpayers and markets.
It will also give the euro zone something to present to finance ministers of the world's 20 biggest developing and developed economies in April in Washington during talks about bigger global contributions to the International Monetary Fund.
A higher euro zone bailout capacity is a pre-condition for most G20 countries to contribute more money to the IMF.
Yet Germany may be able to call the outcome a success, too, because the ESM will not have its full 500 billion euro capacity from the start - the capacity depends on how quickly the ESM's capital is paid in.
The draft foresees that two tranches of ESM capital will be paid in 2012, giving the ESM a lending capacity of 200 billion euros. If added to the 200 billion of existing EFSF bailouts, the total capacity will only be 400 billion.
Even with the 240 billion euros of temporary emergency top-up, the bailout funds' capacity would still be only 640 billion.
And from mid-2013, when the next two tranches of ESM capital are to be paid in, raising the ESM/EFSF bailout capacity to 600 billion, the yet uncommitted 240 billion of EFSF money will no longer be available as a temporary emergency boost.
It would only be in 2014 that the combined bailout capacity of the two funds would effectively reach 700 billion euros.
Euro zone officials note, however, that should the ESM need its full lending capacity earlier, the capital can be raised quickly.
The ministers are also to say that they will continue to review the adequacy of the ESM capital "as appropriate" and "in particular when used EFSF guarantees are freed once financial assistance is repaid".