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Euro-Zone Ministers Stall on Bailout Details

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Euro-zone finance ministers reached no agreement Monday on precisely how the bloc's 17 members will share the burden of enlarging bailout funds, and put off discussions until next week.

But despite the unresolved details, markets reacted warmly to Saturday morning's announcement of a pact to expand the euro zone's current bailout capacity. In trading Monday, the prices of Spanish, Portuguese and Greek bonds jumped, bringing down their interest rates and reflecting improved investor confidence.

The pact is "particularly positive for Portugal," said economists at Danske Bank in a research note, since it expands the ability of euro-zone policy makers to come to the country's aid. Portugal's persistent deficits have led investors to believe it is likely heading for a bailout.

The rate contraction was sharpest Monday in Greece, which won a reduction in the interest it must pay on €80 billion ($111.25 billion) of its €110 billion in bailout loans. (The remaining €30 billion is provided by the International Monetary Fund; its rates aren't changed.)

The 10-year Greek bond traded at 12.4% Monday evening in Europe. That was 9.17 percentage points more than the benchmark German bond, a huge spread that suggested investors still believe Greece will likely be unable to repay its borrowings—but a half percentage point lower than Friday.

Ireland saw barely any market relief in the markets; the Irish prime minister's bid for a similar cut in bailout costs was rebuffed Friday after he refused to consider raising Ireland's low corporate tax rate.

Euro-zone finance ministers will reconsider the Irish rate question at a meeting Monday. A senior official said it will be resolved, with most of the other outstanding questions, as part of the "comprehensive" crisis-fighting package that leaders are expected to agree upon at a summit March 24 and 25.

More details emerged of the Saturday-morning deal, in which leaders also agreed that the bailout funds should be able to buy bonds directly from troubled governments.

Officials depicted the bond purchases as potentially useful for a government re-entering the bond market after having been shut out for a time, but said the option would be available only to countries that had entered a crisis program. They also said one proposal that had been considered in the run-up to the meeting—that the bailout funds should be allowed to act pre-emptively to prevent a country from sliding into crisis—had been ruled out.

There is still plenty of work left to do. Among the thorniest discussions is how to find the funds for a beefed-up European Financial Stability Facility, the main bailout fund. It is backed by €440 billion in guarantees from euro-zone countries, but in practice it can lend only around €250 billion because some of its firepower must be used to overguarantee loans and accumulate a cash balance.

There are several possibilities, among them raising the size of the guarantees well above €440 billion or requiring some countries to put up cash. Countries are still at odds. Raising the guarantees puts yet more of the burden onto the strongest countries, chiefly Germany and France. Contributions of cash to the fund would be hardest on countries like Spain and Italy, which by dint of their size have a large share of the fund but don't have much room in their finances.

Those provisions stem from demands by rating agencies needed to ensure the EFSF itself can borrow on markets with a triple-A rating.

To add to the mix, some smaller countries, including Slovakia, are reluctant participants in the fund.

Jean-Claude Juncker of Luxembourg, who heads the group of euro-zone finance ministers, said Monday his "present feeling is that this will be done by guarantees."

The Irish question is likely to linger. The country's newly appointed finance minister, Michael Noonan, stuck Monday to the tough line brought by his boss last week.

He said Ireland won't "concede on the corporate tax rate as a quid pro quo," adding that he was disappointed that the plans for the EFSF—and its permanent successor fund—at this stage don't allow the funds to help banks directly. (Ireland's woes are driven in large part by massive trouble in its banking system.)

But others in Europe are unlikely to be in the mood to give Ireland more help while it declines to budge on taxes.

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