BRUSSELS (Reuters) - European finance ministers will discuss on Monday how to give their euro zone rescue fund more flexibility and firepower and how to tackle debt crises after 2013, but final decisions are unlikely before March.
Finance ministers from the 17 countries that use the euro and the President of the European Central Bank Jean-Claude Trichet meet to make progress on a new, comprehensive response to the sovereign debt crisis.
They will be joined on Monday evening by ministers from the 10 non-euro zone members of the European Union to discuss the European Stability Mechanism, which is to take over crisis resolution from mid-2013.
To ease debt market tensions now, the ministers are considering changes to the European Financial Stability Facility (EFSF), the 440 billion-euro ($596 billion) bailout fund created last May, to increase its lending capacity and give it more flexibility on how to use its money.
Market concern that there was no agreement on changes to the EFSF after the last European Union summit on February 4 boosted the yields of 10-year bonds from Portugal, the next potential candidate for a euro zone bailout, to 7.37 percent last Friday from around 6.8 percent the week before.
Strengthening the EFSF has been the focus of discussion for months, since it became clear its effective capacity was only about 250 billion euros, not 440 billion, due to guarantees built into the fund to maintain its triple-A credit rating.
"We will have that discussion -- the increase of the lending capacity of the EFSF and broadening its mandate," a euro zone source involved in the preparations for the meeting said.
MORE COMPETITIVENESS FOR BIGGER EFSF
Germany and France want talks on changes to the EFSF to be linked to boosting euro zone competitiveness through higher retirement ages, national laws to cap debt, a common corporate tax base and an end to wage indexing to inflation.
The competitiveness package is not formally on the agenda of Monday's talks but might still be discussed.
"We need to know what Germany wants, because they did not tell anybody what they really want," a second euro zone source involved in the preparations for the meeting said.
The sources said that while there was agreement that the EFSF effective lending capacity should be boosted to the full 440 billion euros, there was no consensus yet on how to do that.
One of the ideas, favored by Germany, is that countries with a triple A credit rating would increase their guarantees for the fund, while those below triple-A would inject cash.
But the first source said such a solution could be divisive.
"I would not exclude anything at this point, but I would think that anything that introduces a wedge between triple-A and non-triple-A countries is unlikely to occur," the source said.
The EFSF now steps in as the lender of last resort to euro zone countries cut off from markets. The ministers will discuss various ways of giving the EFSF more operational flexibility.
"No one wants to narrow down the options at the moment," the second euro zone source said.
"That is what ministers are expected to do. But I would not expect much news coming out, at least not officially, because the final decision is to be made by the heads of state and government," the second source said.
TALKS ON ESM, EU BUDGET RULES
A deal on the revamped EFSF might only be reached once the whole package of measures, which would include the ESM that is to replace the EFSF from mid-2013, is agreed on by EU leaders at a summit on March 24-25, the sources said.
A third euro zone source taking part in the preparations said the European Commission had proposed that the size of the ESM should be 500 billion euros for the support of solvent countries with liquidity problems.
But several euro zone sources said there was no agreement yet on the Commission proposal. Belgium said last year that the ESM should be bigger than the current facility.