(Reuters) - Euro zone leaders may decide on Friday to raise the combined lending limit of their temporary and permanent bailout funds to boost the firewall which they hope will contain the spread of the sovereign debt crisis, euro zone officials said.
The European Financial Stability Facility (EFSF), the temporary fund that is to be replaced by the European Stability Mechanism (ESM) has around 250 billion euros of yet unused funds. It has already committed around 190 billion to bailouts of Greece, Ireland and Portugal.
The ESM was to replace the EFSF in mid-2013, but euro zone leaders want to push its activation forward to next year. The ESM will have a lending capacity of 500 billion euros.
Under the already agreed, but not yet ratified, ESM treaty, the combined lending capacity of the EFSF and ESM should also not exceed 500 billion euros.
A report by European Council President Herman Van Rompuy, who will chair the summit on Friday, said the 500 billion euro limit on the combined lending capacity of the EFSF and the ESM should be “open for review.”
Euro zone officials said the review meant the limitation could now be dropped because policymakers were concerned that they may not have enough cash to help Italy and Spain should markets raise their borrowing costs to unsustainable levels.
“In the draft ESM treaty, the combined capacity of the ESM and the EFSF is 500 billion. The idea is to remove that,” one euro zone official involved in the talks said.
The official explained that under the proposal, that will be discussed by EU leaders at their summit on Friday, when the permanent ESM fund becomes operational, for example in mid-2012, its 500 billion of new lending capacity would come on top of the commitments already made by the EFSF.
If the EFSF, by that time, will have spent for example 300 billion euros of its total 440 billion euro capacity, these loans would not be deducted from the new 500 billion capacity of the ESM, but co-exist separately, on top of the ESM’s full capacity.
“I guess that the leaders will remove the 500 billion combined limit on Friday, but this is just a guess,” the euro zone official said.
A second official confirmed that talks were under way to implement such a proposal, but said it was difficult to say at this stage if the leaders would agree on such a change already on Friday, or would it take more negotiations.
“The idea has been floated but it is difficult to say if it will materialize this week,” the second official said, noting there was no agreement yet on the issue among euro zone countries.
“I would expected something on that in the leaders’ conclusions because firewalls are at the heart of the discussion,” the official said.
The funds available for euro zone bailouts could be further increased through leveraging of the EFSF, or ESM money.
The second official also explained that a call in the Van Rompuy report, which was obtained by Reuters on Tuesday, for the ESM itself to have the “necessary features of a credit institution” was a reference to a banking license the ESM could get from the European Central Bank.
France has long called for the ECB to give the current, temporary EFSF bailout fund a banking license so that the EFSF could refinance itself at the ECB, making use of the central bank’s unlimited resources.
The ECB refused, but officials have said that the situation ESM could be different because unlike the EFSF, which relies only on euro zone government guarantees, the ESM would have 80 billion euros of paid in capital and 620 billion euros of callable capital — making it a true financial institution.
Asked if the ECB would be more willing to grant a banking license to the ESM now than in the past, officials said that the situation on the markets has deteriorated dramatically.
Reporting by Jan Strupczewki; Editing by