EU seeks more lending power, Portugal sells debt

The European Union's executive called for greater emergency lending power to underpin the eurozone as Portugal, seen as the next candidate for a bailout, successfully sold its first debt of the year. "We are saying very clearly that we believe that the financing capacity must be reinforced and the scope of the activities of the (European Financial Stability Facility) should be widened," European Commission President Jose Manuel Barroso said on Wednesday, calling for a summit decision next month.
--- Germany, France say no need to expand current fund
--- Brussels eyes one-off bank levy to fund bailouts
--- Portugal successful with bond issue, 10-year yield falls
But Germany and France, the two biggest euro powers, said the 440 billion euro ($570.9 billion) backstop was sufficient. A spokesman for German Chancellor Angela Merkel said it was neither useful nor necessary to discuss expanding the EFSF.
Senior EU sources said Paris and Berlin were in fact working actively on a systemic response to the debt crisis, including a possible expansion of the EFSF, but the package was unlikely to be ready in time for the February 4 summit. It was more likely to be adopted when EU leaders meet in late March.
Separately, the Commission suggested in an internal report seen by Reuters that a one-off tax could be levied on banks to raise 50 billion euros to fund the future European Stability Mechanism designed to support eurozone states in trouble.
There was no immediate response to the Commission's idea of raising a "critical mass of paid-in capital" for the future ESM, but the main member states have long opposed any form of EU tax. EU Monetary Affairs Commissioner Olli Rehn said work was in progress on raising the lending capacity of the existing rescue fund, which can effectively lend only 250 billion euros because of cash buffers set aside to obtain a top-notch credit rating.
On the markets, Portugal drew strong demand for its 10-year bonds and the yield actually fell slightly to 6.716 percent from 6.806 percent at its last auction, after European Central Bank buying of its bonds this week bought Lisbon time.
Portuguese Finance Minister Fernando Teixeira dos Santos called the auction a success, with 80 percent of the demand from overseas investors. But there was no sign that markets saw it as a turning point in the eurozone debt crisis. While the borrowing cost was below the 7 percent threshold regarded as unsustainable, analysts cautioned that Portugal has a lot more debt to sell in 2011, with a potential funding crunch in April.
Germany and France praised Portugal's austerity measures and said it needed to convince investors it was implementing reforms effectively to control its public finances and revive a stagnant economy. Given traumatic memories of two IMF interventions following the 1974 revolution that overthrew Europe's longest-running dictatorship, Socialist Portuguese Prime Minister Jose Socrates is determined to avoid applying for aid if at all possible.
The issue looms large in Portugal's presidential election campaign with both of the main candidates for the January 23 ballot trying to use it to discredit the other. Socrates, who heads a minority government dependent on opposition votes to pass legislation, has insisted his country is ahead of target in reducing its deficit and does not face the acute problems that drove Greece and Ireland to seek help.
Optimism that a more effective EFSF may be in the works helped reduce the risk premium investors demand to hold Spanish and Italian government bonds rather than benchmark German debt. But eurozone sources say any increase in lending capacity could be limited by the dual constraints of credit ratings and the need to avoid a new round of parliamentary approvals, particularly in Germany.
High-debt Belgium's caretaker prime minister said his government will aim for a budget deficit of less than 4.0 percent of gross domestic product this year, compared with 4.7 percent forecast by the Belgian central bank.