The euro zone nations have reached a deal to build up a massive 800-billion-euro (around $1.1 trillion) financial firewall to prevent the two-year-old sovereign debt crisis from engulfing larger economies such as Spain and Italy.
The finance ministers of the 17 nations using the single currency agreed yesterday at the start of a two-day meeting in Copenhagen to bolster the firepower of euro zone's financial bailout fund to 700 billion euros.
It will be done by bringing together the temporary European Financial Stability Facility (EFSF) and the permanent fund European Stability Mechanism (ESM), which has an initial funding capacity of 500 billion euros.
ESM, which was intended to replace the EFSF in June, next year, has been brought forward a year earlier and it will run side-by-side with the EFSF for a limited period.
The ministers decided to add to ESM around 200 billion euros pledged for Ireland, Portugal and Greece from the EFSF.
Around 53 billion euros disbursed so far from the first bailout package of 109 million euros offered for Greece by the EU in May, 2010 and 49 billion euros from the European Commission's aid programme will make up the rest of the expanded financial safety net.
They also agreed to keep around 240 billion euros left unutilised in the EFSF as 'reserve' until mid-2013.
It will not be added to boost the size of the new bailout fund to 940 billion euros as demanded by European Commission, some member nations as well as by the Organisation for the Economic Cooperation and Development (OECD), the ministers said. However, this resource will be tapped if the ESM's funding capacity will not be sufficient to cope with a new crisis, they said.
The euro zone nations are hoping that the massive financial firewall will act as a deterrent against attacks by speculative investors in the financial markets on heavily- indebted nations such as Spain or Italy and thereby drive up their borrowing costs.
Greece, Ireland and Portugal had to be rescued by EU and IMF after their borrowing costs reached unaffordable levels.
The euro zone also has been under pressure from the International Monetary Fund (IMF) and the G-20 nations to deal with its debt crisis effectively by substantially boosting its bailout fund.
The euro group took "a significant decision to reinforce the euro area financial firewalls by raising the combined ceiling for the ESM and ESF to 700 billion euros", European Commissioner for Economic and Monetary Affairs Olli Rehn said in a press statement.