Euro zone nations are working on a "comprehensive package" of measures they hope will end the bloc's year-long debt crisis. Germany, Europe's biggest economy and the key to any deal, expects agreement by end-March.
No decisions have been taken yet, euro zone officials with knowledge of the talks said, not least because the package is likely to include a broad set of commitments.
There will be some discussion of the contents of the package at a European Union summit on Feb. 4, but a senior euro zone source said leaders would mostly provide policy guidance at that meeting, with final decisions taken only in March.
Below are policy ideas that have been discussed formally or informally; some face strong opposition from Germany and appear unlikely to make it into the package.
INCREASING THE EFFECTIVE LENDING CAPACITY OF THE EFSF
There is a strong chance of this step being adopted. The nominal lending capacity of the European Financial Stability Facility, the euro zone bailout fund, is 440 billion euros, but because of a system of guarantees to secure a triple-A credit rating, the special purpose vehicle has an effective lending capacity of only around 250 billion euros.
The European Commission, France, Germany and several other euro zone countries agree the effective lending capacity should be boosted to the full 440 billion euros and talks are focusing on how to do that.
Raising the EFSF's overall size above 440 billion was rejected by euro zone ministers on Jan. 17.
HOW COULD THE EFSF'S CAPACITY BE INCREASED?
Lifting the EFSF's effective lending capacity within the 440 billion limit could require euro zone states to increase their guarantees for the facility's borrowing, forcing some governments to seek fresh approval from their parliaments.
This could be politically tricky in countries such as Germany where public opinion is against bailouts of countries that have been overspending or not kept budgets in check.
Berlin has indicated that instead, euro zone countries with a rating below the top notch could inject cash into the EFSF, making up for their lack of a triple-A grade.
If the 11 non-AAA countries in the euro zone injected cash, the fund would no longer need cash buffers to secure its rating and could therefore lower its interest rate.
LOWERING THE INTEREST RATE ON EFSF LOANS
Germany has indicated it might agree to this in exchange for concessions by countries in other areas. The EFSF now charges a penalty margin of 3 percentage points on top of the interest rate at which it lends money to governments frozen out of debt markets, plus a one-off 0.5 percentage point fee.
It is not clear how large any reduction might be, but investment bank JP Morgan said in a research paper that to make the debts of Greece and Ireland sustainable after 2013, the European Union needed to extend its emergency lending at a rate of about 1 percentage point above German Bunds.
German Deputy Finance Minister Joerg Asmussen has said Germany could consider a lower EFSF rate in exchange for "a kind of national fiscal framework to be enshrined" in recipient countries' constitutions — most likely meaning some form of debt limit.
HAVING THE EFSF BUY COUNTRIES' BONDS FROM THE MARKET
The European Central Bank strongly supports this idea and France backs it too, but Germany has been strongly against it on the grounds that it would increase the exposure of major contributors to the EFSF.
The proposal is for the EFSF to be allowed to buy the government bonds of a troubled country from the secondary market, in a programme similar to the ECB's bond-buying scheme.
The European Union executive has suggested allowing the planned European Stability Mechanism, which will replace the EFSF in 2013, to buy government bonds. But this would likely be done under strict conditions to limit the mechanism's exposure and ensure beneficiary states undertook reforms.
HAVING THE EFSF LEND COUNTRIES MONEY FOR BOND BUY-BACKS
This idea came up in the context of Greece. Euro zone sources said one idea under discussion was for the EFSF to lend money to Greece so that the Greek government could buy back its bonds from the market at the deep discount where they are currently trading — or slightly above to entice sellers.
Because the buy-backs would be voluntary, at or near market prices and involve only some of Greece's debt, this plan would not be called debt "restructuring" or mean a legal default by Greece. Since it would involve participation by the private sector, the German government might find it easier to sell to domestic public opinion and be more willing to agree to it.
FLEXIBLE CREDIT LINE
Another idea is to let the EFSF extend a credit line to an at-risk country in a scheme modelled on the International Monetary Fund's flexible credit line, which has been provided to Poland, Mexico and Colombia. This would be a precautionary step to reassure investors that money was at hand for a country which had a fundamentally sound economy and policies, but which could find itself temporarily under stress from the markets.
EXTENDING MATURITIES ON DEBT
German central bank chief Axel Weber has suggested transforming international rescue loans to Greece and Ireland into 30-year loans, euro zone sources said. Current maturities are three years for Greece and seven for Ireland.
It is not clear whether Weber has German government backing for the idea, but German Finance Minister Wolfgang Schaeuble this week did not rule out a radical reprofiling of Greek debt. That suggests Germany might accept such a step.
The idea of a debt swap for private investors, who would be invited to exchange their Greek bonds voluntarily for new bonds with maturities of maybe 15 to 20 years, has also been floated.
Germany and some other governments have opposed any "haircut" in which creditors would give up part of the principal of their bonds, and they have opposed any non-voluntary scheme imposed on creditors. So such schemes are unlikely to go ahead for now at least.
EURO ZONE BONDS
The idea of issuing joint euro zone bonds to help weak borrowers obtain money more cheaply, which was aired by some officials last year, is unlikely to be discussed seriously because of adamant opposition from Germany.
BANK STRESS TESTS
The European Union plans to conduct a new round of bank stress tests, with tougher conditions and possibly more transparency, over the next few months to establish potential losses of banks and their recapitalisation needs.
Stress tests published last July initially reassured markets but the positive effect faded after Irish banks, which had done well in the tests, ran into serious trouble. There is no agreement yet on the full set of conditions that banks should be tested on this time.
Action on Spain's indebted savings banks or cajas may be presented as part of the EU's package; last week the Spanish government stepped up its clean-up plan, ordering the banks to boost core capital to 8 percent by September or be partly nationalised.
ECONOMIC REFORMS IN EURO ZONE STATES
In exchange for cooperation in other areas, Germany wants a euro zone pact to improve the bloc's economic health by targeting states' wage costs, public finances and corporate taxation. According to draft papers from the German government, seen by Reuters, Germany wants:
— to abolish rules linking wage growth to inflation in the euro zone.
— to introduce rules in the constitutions of euro zone countries that public debt cannot exceed a certain level. France and Spain have already indicated they could support that idea.
— higher retirement ages, linking retirement ages to demographic developments.
– a common basis of assessment for corporate tax.
– introduction of national anti-crisis regimes for banks.
