By Jan Strupczewski and Julien Toyer
BRUSSELS (Reuters) - European leaders agreed on Saturday to strengthen the euro zone bailout fund, make its loans cheaper and lower the interest rate on loans extended to Greece, a move to get on top of the year-long debt crisis.
In 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 pay into the European Financial Stability Facility, allowing its capacity to be increased to the full 440 billion euros, from a current level of around 250 billion euros.
They 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 50 basis point one-off charge.
Ireland, which received an 85 billion euro bailout from the EU and IMF last November, could also benefit from the lower interest rates, but it will depend on discussions on a common corporate tax base, which Ireland strongly opposes.
Newly elected Irish Prime Minister Enda Kenny said he had made it clear during more than seven hours of talks that a harmonized EU tax base would be detrimental to Ireland, which has an attractive 12.5 percent corporate tax rate.
"I made it perfectly clear that the (common consolidated corporate tax base) in my view was harmonization of the tax rates by the back door and this would be very detrimental to Ireland and indeed to Europe," Kenny told reporters.
French President Nicolas Sarkozy said a deal on Ireland could still be reached at a summit on March 24/25, when EU leaders will meet to sign off on what they have called a "comprehensive package" to tackle the debt crisis.
In further changes to try to make the EFSF more flexible and better able to stave off pressure in financial markets, the leaders agreed to let the bailout fund buy the bonds of distressed euro zone member states in the primary market.
That will also be the case with the European Stability Mechanism, a permanent facility that will replace the EFSF from mid-2013 and will have an effective lending capacity of 500 billion euros.
"Financial assistance from the ESM and EFSF will take the form of loans," Van Rompuy said. "However, to maximize the cost efficiency of their support, the ESM and the EFSF may also, as an exception, intervene in the debt primary market in the context of a program with strict conditionality."
As a further part of their efforts to get on top of a crisis that has engulfed Greece and Ireland and continues to threaten Portugal, the member states agreed that plans should be in place to deal with any bank that demonstrates vulnerabilities in stress tests that will be completed in the coming months.
Bad debts in the European banking system continue to undermine efforts to get on top of the broader crisis, exacerbating sovereign debt problems. Many analysts say the sovereign debt crisis cannot be resolved without a solution to the bad banking debts, which could involve debt restructuring.
(With additional reporting by James Mackenzie, Luke Baker, Justyna Pawlak, David Brunnstrom, Eva Dou, Ilona Wissenbach and Andreas Rinke)