Euro zone leaders agree to strengthen bailout fund

European leaders agreed to strengthen the euro zone bailout fund today, make its loans cheaper and lower the interest rate on funds extended to Greece, a move to get on top of the year-long debt crisis.

As part of a bold series of steps that may help to calm some of the pressure in financial markets, the leaders of the 17 countries that share the European single currency said they would increase the guarantees they provide to the bailout fund to allow it to raise capital on international markets.

As a result, the effective lending capacity of the European Financial Stability Facility will be increased to the full 440 billion euros, from a current level of around 250 billion euros (£215bn).

That should ensure that the fund is capable of bailing out any euro zone states beyond Greece and Ireland that require assistance, with Portugal seen as the next most likely country to need financial help, and possibly Spain after that.

The leaders also agreed to lower the interest rate and lengthen the maturity on loans extended to Greece, reducing the rate by 100 basis points to bring it into line with IMF lending. The term on the 110 billion euros of EU/IMF loans was lengthened to 7.5 years from three, giving Athens more time to repay.

"Pricing of the EFSF should be lowered to better take into account debt sustainability of the recipient countries," Herman Van Rompuy, the president of the European Council, told reporters after the summit of the leaders concluded.

Any loans made by the EFSF to any new potential applicant country would be in line with IMF rates. The EFSF now charges a 300 basis point penalty fee for its credit and a 50 basis point one-off charge.

While Portugal, which is currently paying around 7.5 per cent on its 10-year bonds, is regarded as a candidate for a bailout, it reiterated today that it did not need help and had no intention of asking the EU for assistance.

Ahead of yesterday's meeting, Portugal announced a series of extra spending cuts to bring its budget deficit down to 4.6 per cent in 2011, steps that were praised by the European Commission and the European Central Bank and may help convince markets that Lisbon is doing enough to stave off attack.

Ireland, which received an 85 billion euro bailout from the EU and IMF last November, may also benefit from the lower rates granted to Greece, but it will depend on discussions on a common corporate tax base, which Ireland opposes.