Euro zone finance ministers will speed up work on strengthening their bailout fund on Monday to enhance its market credibility by the end of November, a month early, as concern grows about Italy, euro zone officials said.
Euro zone leaders agreed last week to scale up the 440 billion euro European Financial Stability Facility (EFSF) to convince markets they can prevent Italy and Spain from being swept up by the sovereign debt crisis which has already claimed Greece, Ireland and Portugal.
The agreement of the leaders of the 17 countries using the euro to leverage the EFSF by 4-5 times still needs, however, technical details to be provided by finance ministers before the EFSF's bigger firepower can be demonstrated to markets.
"The original plan was to have the details ready by the end of the year," one euro zone official said.
"But there is a clear sense that we have to accelerate the finalisation of the technical details, because tensions in the markets have increased after the last Greek episode and we don't know what may happen next," the official said.
"Considering the pressure on countries like Italy, which presents an enormous challenge, there is a sense we need to have it (leveraged EFSF) ready already by the end of this month," the official said.
Greece sparked panic in the market and shocked fellow euro zone countries by announcing last Monday it would call a referendum to seek citizens' approval for an emergency financing package that euro zone governments, private investors and the IMF agreed on after tortuous talks on Oct. 27.
Greece has since dropped the referendum plan and its politicians agreed on Sunday to form a unity government to enact the unpopular 130 billion euro package.
But markets are worried about how the euro zone debt crisis will develop and yields of Italy's benchmark 10-year bonds rose to 6.39% on Friday, from 5.88% on Oct. 27.
Many economists believe that once yields rise above 7%, the financing costs for a government become too high and a country is forced to ask for a bailout.
"The pressure on Italy is quite significant if you look at how the yields have increased over the last days -- it is worrying," a second euro zone official said.
"All the parties agree there is a need to accelerate the work on the leveraging of the EFSF," the official said.
Italy, Greece to report to Eurogroup
Italy's Finance Minister Giulio Tremonti will tell his fellow euro zone colleagues how Rome plans to implement a list of reform commitments made in late October, including public asset sales, a change to employment laws and a pension reform.
The implementation of the reforms, which are to boost Italy's weak growth and make it a more credible borrower in the eyes of the market, will also be monitored by the International Monetary Fund.
Greek Finance Minister Evangelos Venizelos is to brief the Eurogroup on the latest developments in Athens, where Prime Minister George Panadreou agreed to step down to allow a unity government to be formed to push through the bailout deal.
Party leaders have yet to announce who will replace him.
The European Union wants the Greek parliament to approve the emergency financing package for Athens agreed on Oct. 27, before any more euro zone loans are disbursed to Greece.
Athens must get the next, 8 billion euro tranche of aid before mid-December, if it is to stave off bankruptcy.
"After the presentation from Mr. Venizelos there will be a discussion what will happen with the next tranche of aid. As long as there is uncertainty about the commitment of the Greek authorities, the money cannot be paid," the official said.
More input to the discussions on Monday on EFSF leveraging will come from the summit of G20 biggest economies in Cannes on Nov 3-4, where interest in details of the idea was high, and from a visit to Asia by EFSF Chief Executive Klaus Regling.
Existing and planned EFSF lending commitments leave around 250 billion euros in the fund, which the euro zone wants leveraged to a headline figure of around 1.0 trillion euros.
Euro zone leaders want this done by offering first-loss guarantees to purchasers of euro zone debt in the primary market or via a special purpose vehicle that would be set up in the coming weeks and which would aim to attract investment from countries like China or Brazil, possibly via the International Monetary Fund.
IMF role in EFSF leveraging
An IMF official, possibly the head of the fund's European department Antonio Borges, will take part in the meeting of the Eurogroup on Monday.
"The involvement of the IMF in EFSF leveraging is not yet decided, but it is important that they can have a say," the first official said.
Markets had hoped that some cash rich emerging market powers like China or Brazil would invest in the EFSF's special purpose vehicle and were disappointed on Friday when German Chancellor Angela Merkel said after a meeting of leaders of the G20 biggest economies that few countries were ready to contribute.
But some euro zone officials said the lack of concrete investment declarations so far could have been due to lack of agreed details about the project, since many G20 leaders were interested in the idea and asking for details.
Some countries could be more willing to invest in such a venture through the IMF, rather than directly, officials said.
"Frankly, it looks more like our international partners want IMF involvement, because IMF involvement is a way for others to get involved," the first official said.