* Germany eases opposition to bigger EU bailout fund-officials
* EU agreement in March would clear way for April IMF deal
* Puts G20 on track for $2 trillion in total bailout funds
By Daniel Flynn and Francesca Landini
MEXICO CITY, Feb 25 (Reuters) - Germany is easing its opposition to a bigger European bailout fund, officials said, smoothing the way for the world’s leading economies to secure nearly $2 trillion in firepower to prevent further fallout from the euro-zone’s sovereign debt crisis.
Finance leaders from the Group of 20, meeting in Mexico City this weekend, are trying to build up massive international resources by the end of April to convince financial markets they can prevent the euro-zone’s deep problems from inflicting more damage on a still-fragile world recovery.
It would mark their boldest efforts since 2009 when the G20 mustered $1 trillion to rescue the world economy from the credit crisis, which blew up in the United States and caused the worst recession since the 1930s.
They are demanding that Europe build up its war chest first and then other G20 countries would contribute extra money to the International Monetary Fund. As Europe’s richest economy, Germany’s support for a larger European fund is critical.
A senior G20 official said Berlin was prepared to discuss boosting the firewall in March, but it saw no reason to increase the bailout fund for now because the situation in financial markets has been improving.
The plan is to merge Europe’s temporary and permanent bailout funds, the European Financial Stability Fund and the European Stability Mechanism , to create one 750 billion-euro ($1 trillion) fund. Increased IMF resources would back that up.
“Everyone in the euro zone and even in European Union is reasonably happy with combining the ESM and the EFSF, even Germany, but it is too early to say if this will be decided at the EU summit at the beginning of March,” said Margrethe Vestager, economy minister of current EU president Denmark.
Merging the funds would mark a softening of Berlin’s stance. It has warned that a bigger fund would remove pressure on deeply indebted countries to enact the tough fiscal measures and economic reforms needed to bring their budgets under control.
G20 finance chiefs are piling the pressure on Germany as they try to line up the roughly $2 trillion in resources by the time they next meet in April and draw a line under the two-year-old euro-zone crisis.
“I do want to encourage Germany to take that leadership role very seriously and come up with an overall euro zone plan,” said Canada’s Finance Minister Jim Flaherty.
Some diplomats have said Germany’s reticence to back the bigger bailout plan was linked to a key vote on Monday by German lawmakers on Greece’s new financial lifeline, another part of the broader push to ring-fence the euro zone crisis.
Europe’s problems have weakened the global recovery and roiled financial markets, which have locked highly indebted countries — Greece, Ireland and Portugal — out of debt markets and forced them to seek bailouts. Italy and Spain also are under threat, and bank credit has tightened.
German Finance Minister Wolfgang Schaeuble told bankers in Mexico City that he was worried that the root causes of Europe’s problems have not been tackled sufficiently and showed no sign that he was ready to announce a shift in course on issues such as common euro zone bonds as well as bigger bailout funds.
“It does not make any economic sense to follow the calls for proposals which would be mutualizing the interest risk in the euro zone, nor in pumping money into rescue funds, nor in starting up the ECB printing press,” Schaeuble said.
A European agreement during March to merge the EFSF and the ESM to create a $1 trillion war chest would clear the way for other G20 countries in April to meet the IMF’s request for $500-$600 billion in new resources, on top of its current $385 billion in funds.
Put together, this would total around $1.95 trillion in firepower. But the G20 has no intention of easing the pressure on Europe by giving it a strong signal now that new IMF money is in the bag.
A G20 communique at the end of the ministerial meetings on Sunday will merely state that the world’s leading economies will review the resources of the IMF in April without setting a date for a deal, G20 officials said.
Olli Rehn, European Commissioner for Economic and Monetary Affairs, said more funds are essential. “In order to overcome the crisis, you have to get ahead of the curve and have a big enough bazooka,” he told reporters.
“The negotiations are now going on,” Rehn said, adding he was confident that a decision to merge the European funds would be taken in March.
A euro zone official said a deal is unlikely to come in time for a summit of European Union leaders next week which could nonetheless reveal some flexibility by Berlin: “What we can expect, at most, is a reference in the conclusions suggesting Germany is not closing the door.”
Diplomats said Germany appears to be playing for time. It faces a critical vote on Monday to win support in the German parliament for Greece’s second rescue package. Many Bundestag members are skeptical that Greece can meet tough fiscal conditions required to bring its public debt down to 120 percent of GDP by 2020.
Similar votes are scheduled in the Netherlands and Finland next week. Germany also wants to see whether enough investors sign up for Greece’s debt swap, which Athens wants to complete by March 12, a 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,” one euro zone official said.
The United States has said it will not provide more funds for the IMF. But it is not standing in the way of other countries lending to the Fund and is keeping up the pressure on Europe to put forward first more of its own money.
“I hope that we’re going to see, and I expect we will see continued efforts by the Europeans ... to put in place a stronger, more credible firewall,” U.S. Treasury Secretary Timothy Geithner said on Saturday.
Policymakers said they were hopeful that putting in place a strong firewall against further crises in Europe would help strengthen the world economy.
“The economy is somewhat picking up in the world as a whole including Japan and (we) want to put an end to the Europe crisis in the early spring and to accelerate the global economic growth,” Japan’s Finance Minister Jun Azumi said.