Official Urges Europe to Expand Bailout Fund

BRUSSELS — As Portugal gained some breathing room Wednesday with strong demand for its bonds, the head of the European Commission tried to force the pace of discussions on the debt crisis — and set up a potential clash with Germany — by calling for decisions early next month to broaden the euro zone’s bailout fund.  The fund’s “financing capacity must be reinforced and the scope of its activities widened,” José Manuel Barroso, the commission president, told a news conference. He said it was “perfectly possible” to take decisions no later than Feb. 4, when European Union leaders gather.

European officials say Mr. Barroso sees an opportunity, after Wednesday’s relatively successful bond auction by Portugal, to end a cycle in which the 17 euro zone countries have been forced by market pressure into crisis management, bailing out first Greece then Ireland under duress from bond traders. “We have to get this over and done with,” said one European official speaking on condition of anonymity because of sensitivity of the issue.  The Portuguese auction was seen as a critical test of market confidence and came before a similar test for Spain with the sale of 3 billion in five-year bonds on Thursday. Italy, which has been more sheltered from financial market pressure than Portugal and Spain, is also selling as much as 6 billion euros of debt due 2015 and 2026 on Thursday.

In the sale, Portugal was able to push its key long-term borrowing costs down slightly during the sale of 1.25 billion euros, or $1.6 billion, of bonds, which was at the upper limit of its planned auction. The sale included 599 million euros of 10-year bonds at an average yield of 6.72 percent, down from the 6.81 percent at the previous sale Nov. 10. The bonds were roughly three times oversubscribed, compared with twice oversubscribed at the previous sale.

But the results were different with shorter-term bonds. The 650 million euros of bonds maturing in 2014 went for an average yield of 5.4 percent, compared with 4.04 percent in October. Investors bid for 2.6 times the bonds on offer, slightly less than in October.

In his call to broadening the size of the fund, Mr. Barroso went further than many expected, partly in an effort to put the European Commission, the bloc’s executive, at the heart of the discussion.

But the initial reaction from Berlin and Paris was negative. A spokesman for the Chancellor Angela Merkel of Germany said it was neither useful nor necessary to discuss whether to increase the 440 billion euros, or $570 billion, rescue fund for ailing euro zone-states, Reuters reported from Berlin. “We consider that the fund as it stands today is sufficiently big to meet requests made by this or that country,” added Francois Baroin, speaking for the French government in Paris, according to Reuters. Some governments argue that extending the capacity of the fund sends a signal that the European Union expects Portugal, and maybe Spain, to call upon it and could therefore be self-defeating.

But many diplomats believe that opposition in Berlin and Paris is bound to weaken, particularly if market pressure continues. “Everyone knows what options we are talking about but now they have to decide and take a clear position,” said one European diplomat, who was not authorized to speak publicly. No formal proposals have been drawn up but a range of options have been on the table for weeks, and will probably be discussed next Monday and Tuesday when European finance ministers meet in Brussels.

Such a discussion needs to take place within the next few months anyway because the European Union decided last month to make the bailout fund permanent from 2013. But the commission is pressing for a quicker solution. The ideas being pushed by the commission include an increase to allow the bailout fund’s full headline figure of 440 billion euros to be made available for loans, according to officials with knowledge of the discussion. Because of the way it is structured, analysts estimate that the fund, which has already been called upon by Ireland, can lend substantially less at present, possibly around 250 billion euros.

Perhaps more important, suggestions being circulated would give the euro zone more tools to ease market pressure. This could include giving the bailout fund the ability to buy bonds of countries under market attack. Another possibility is to allow the fund to extend credit lines to countries that are under market pressure but are succeeding in bringing down their deficit in line with European recommendations. This could allow them to avoid having to accept a full bailout, with all the attendant strings imposed by the European Union and the International Monetary Fund.

Fernando Teixeira dos Santos, the Portuguese finance minister, said his country’s bond sale was “clearly a success” and vindicated the government’s efforts to continue to tap financial markets rather than seek rescue funding.