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Euro zone seeks middle ground on rescue fund size

By Robin Emmott

BRUSSELS (Reuters) - Euro zone finance ministers are moving closer to agreeing a combined rescue fund of around 700 billion euros ($924 billion) in Copenhagen next week and anything higher would probably be too ambitious, euro zone diplomats said on Friday.

The EU's top economic official, Olli Rehn, is pushing for a big fund capable of bailing out indebted euro zone countries such as Italy and Spain, should they be cut off from the markets, despite resistance in Germany, the bloc's paymaster.

So far, Germany has refused to countenance any combination of the various rescue funds.

In a final push to press Berlin and others to go further, the European Commission circulated a document to member states this week in Brussels, proposing an increase to as much as 940 billion euros.

But three diplomats said that was unrealistic, as the European Central Bank has already injected 1 trillion euros in stimulus to banks, and EU governments have committed to tough economic reform and fiscal discipline to calm financial markets.

"Officials are moving towards the middle ground of giving the combined fund a lending capacity of 700 billion," said one euro zone diplomat who had seen the Commission report that was also obtained by Reuters.

Finance ministers and central bankers will discuss the size of a bailout firewall in Copenhagen next Friday. That would likely be made up of the European Financial Stability Facility (EFSF) that had been due to be wound up next year, and the European Stability Mechanism (ESM) permanent fund that was set to replace it.

The 440 billion euro EFSF and the 500 billion euro ESM now have a combined lending ceiling of 500 billion euros, which means that in the 12 months from July, when they will co-exist, they would not be able to lend beyond that limit.

Last week, senior euro zone officials told Reuters that the 17-nation currency area is likely to agree on a combined fund of almost 700 billion euros in a trade-off between German opposition to more funds and the need to reassure investors.

"The signals we are getting is that Germans are going to come on board," said another diplomat.

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For full multimedia coverage: http://r.reuters.com/xyt94s

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WHAT BERLIN WANTS

Under the Commission's central proposal, the two funds would be allowed to add up to 940 billion euros, transferring the EFSF's remaining firepower into the ESM.

That means the lending capacity of the ESM would be 740 billion euros, taking out existing emergency loans to Portugal, Greece and Ireland.

"The markets would be most likely to consider the new lending capacity sufficient and the brunt of the stabilization effort would no longer fall on the ECB," the report said.

The Commission hopes that would help motivate other major global powers such as the United States and China to give more funds to the International Monetary Fund to deal with any further fallout from the debt crisis.

Two other proposals sketched out by the EU's executive include one that would allow the EFSF and ESM to operate independently of one another until the EFSF is wound down next year. That would also equate to a joint-lending capacity of 740 billion euros but only until the EFSF is closed.

A third alternative would be to disband the EFSF ahead of 2013, making the ESM responsible for all lending. This model would see total lending capacity at 500 billion euros.

"The question is what Germany might want in return to agreeing to a bigger firewall, be it more austerity from member states, or a German in one of the top posts soon to be vacant in the EU," said a third diplomat.

European governments are jostling for four coveted jobs, including the post of coordinating policy between euro zone finance ministers, known as the president of the Eurogroup.

Germany has put forward its finance minister, Wolfgang Schaeuble, for the influential post, sources told Reuters this month, although that move may also be a negotiating ploy.

(Reporting by Robin Emmott. Editing by Jeremy Gaunt.)

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