EU agrees how to fill permanent financial rescue fund

(BRUSSELS) - European finance ministers agreed Monday the modalities of a permanent bailout fund that will have an effective lending capacity of 500 billion euros.

To reach that headline figure, states will require to pump in a capital base of 700 billion euros ($996 billion), Luxembourg Prime Minister Jean-Claude Juncker said after talks among European Union governments.

"To have that effective lending capacity... experience tells us we need to allow for this kind of margin," said Juncker, who heads the Eurogroup of finance ministers from the 17 states that share the single currency.

The deal on how to fund the European Stability Mechanism (ESM) came less than 72 hours from the start of a summit of European Union leaders.

The EU had "every reason to be optimistic about the outcome" of the two-day summit, the self-imposed deadline set by leaders to set out their "comprehensive" response to a year-old sovereign debt crisis, said Hungarian Foreign Minister Janos Martonyi, whose country is chairing the EU presidency.

It will see "paid-up" capital of 80 billion ploughed in under a "key" for contributions that will be revisited at a later date -- the first 40 billion by July 1, 2013, and the rest over three subsequent years.

Juncker said the remaining 620 billion would come in the form of guarantees from eurozone states, in order to obtain the best possible credit rating.

"We invite the national parliaments to endorse this overall amount... so that in every circumstance, the ESM will have at its disposal the necessary amount of funding," said EU economic affairs commissioner Olli Rehn.

The permanent emergency rescue mechanism for eurozone countries will replace an existing, 440-billion European Financial Stability Fund as of January 1, 2013. It will be created by a special treaty among eurozone states and based in Luxembourg, like its predecessor.

The existing fund has already been tapped by Ireland, and appears increasingly likely to be used by Portugal, as the government there admitted Monday as a political storm gathers in Lisbon.

"Right now, the political crisis is effectively helping to push the country into the arms of external aid," said Finance Minister Fernando Teixeira dos Santos after the head of Portugal's main opposition party put negotiations with the minority government over its plans to impose more austerity measures on hold.

Although ministers did not tackle how to ensure an effective lending capacity of 440 billion euros as promised for the EFSF, Juncker said the eurozone should be trusted to deliver between now and June, as "political and legal" agreements are completed.

One major difference is that the new fund will be able to buy bonds issued by eurozone governments aimed at raising public finance, but only with strict conditions attached such as those countries having negotiated an adjustment programme in exchange for a bailout.

In all cases, loans will require the parallel participation of the International Monetary Fund -- but they will be handed out in line with IMF pricing, which has levied lower rates on Ireland to date than loans from eurozone or non-euro partners such as Britain and others.