Euro zone finance ministers met on Monday to work out the details of a deal hammered out by their leaders to bolster their bailout fund and ease the terms on aid to Greece amid a positive reaction from financial markets.

The ministers are putting the finishing touches to a comprehensive package of measures outlined early on Saturday, aimed at ending the year-old sovereign debt crisis and preventing any new problems.

The measures that euro zone leaders agreed on still need formal approval at the next EU summit on March 24-25, but they seem to address most of the markets' concerns.

We are on a good path to achieving everything by the EU summit at the end of March... making the necessary decisions in a way that everything is in place so that the confidence of the financial markets in the stability and sustainability of the euro is indeed further cemented, German Finance Minister Wolfgang Schaeuble told reporters on entering the meeting.

Market reaction to the deal was positive on Monday. Greek/German 10-year yield spreads were 54 basis points narrower on the day at 915 bps. The yield on the benchmark Portuguese 10-year bond fell to 7.60 percent at 1243 GMT (8:43 a.m. EDT) from 7.87 percent on Friday.

In our view (the leaders') agreement, relative to the dampened expectations of the last few weeks, provides good momentum for a solution to EMU's structural issues, said Gilles Moec, economist at Deutsche Bank.

However, a lot still needs to be fleshed out within the next two weeks, and the absence of a deal on Ireland is a disappointment, he said.

While euro zone leaders cut the interest rate on their bilateral loans to Greece by 100 basis points and more than doubled their maturity to 7.5 years, Ireland did not get a cut in borrowing costs because it did not want to discuss harmonizing the corporate tax base.

WAYS AND MEANS

The leaders agreed in their midnight talks on Friday that the effective lending capacity of the euro zone rescue fund, the European Financial Stability Facility (EFSF), should be raised from the current 250 billion euros to the nominal value of 440 billion euros.

The effective capacity of the EFSF is currently lower than the nominal value because not all euro zone countries issuing guarantees have the triple A rating that the fund wants.

The ministers are now discussing how to achieve the higher lending capacity -- either via raised guarantees for EFSF borrowing by all euro zone members, or by a mix of higher guarantees and capital injections into the fund.

The guarantees, on a pro rata basis, now stand at 120 percent of a country's share in the capital of the European Central Bank.

The ministers will also have to decide how to implement other changes to the fund agreed by the leaders -- allowing the EFSF to buy bonds of distressed sovereigns at primary bond auctions and lowering the interest rate charged for the loans.

Perhaps the most important development is the willingness to lower the interest rates on the EFSF loans, Nick Kounis, economist at ABN Amro, wrote in a research note.

The interest rate, together with the primary budget balance and economic growth, is crucial to the government debt outlook and hence the solvency of particular governments, he said.

Euro zone leaders agreed that the new EFSF interest rate should be lowered to better take into account debt sustainability of the recipient countries, while remaining above the funding costs of the facility, with an adequate mark-up for risk, and in line with the IMF pricing principles.

The ministers will be joined later on Monday by finance ministers from the 10 European Union countries that do not use the euro. Together they will discuss the technical aspects of setting up the successor to the EFSF, the European Stability Mechanism (ESM), which will become operational in mid-2013.

They will discuss the mix of paid-in capital, callable capital and guarantees that will back the ESM's 500 billion euro effective lending capacity, and on the timetable for paying it.

The ESM will provide help to euro zone countries that are solvent but have liquidity problems, after a unanimous decision by euro zone countries and on the basis of a debt sustainability assessment by the European Commission, the IMF and the ECB.

Like the EFSF, the ESM will be able to intervene in the primary bond market and the price of its loans will be in line with IMF pricing principles.

But if the IMF and the Commission decide a country's debt is unsustainable, the government will have to negotiate a debt restructuring deal with its creditors.

To facilitate that, euro zone bonds issued from mid-2013 will carry collective action clauses that prevent minority bond holders from blocking a restructuring deal for the majority.

EU finance ministers will end their day with a discussion on tougher EU budget rules and a mechanism to monitor and correct macro-economic imbalances in the single currency area.

(Editing by Tim Pearce and Rex Merrifield)

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