The euro zone is likely to increase guarantees for its bailout fund to boost its effective lending capacity, Eurogroup President Jean-Claude Juncker said on Monday, but a deal was likely only next week.

Euro zone leaders agreed early on Saturday that the capacity of the European Financial Stability Facility (EFSF) should be raised to its full nominal value of 440 billion euros from the current 250 billion, but left it to ministers to work out how.

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.

We are discussing ways and means how to return to the initial level of 440 (billion euros). Will this be done by guarantees or could there be other means? My present feeling is that this will be done by guarantees, Juncker told a news conference after the ministers' meeting.

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. Germany has floated the idea that countries with ratings lower than AAA should inject cash into the facility.

We have to discuss further details next week, Juncker said adding there would be an extra ministers' meeting on March 21 to deal with all the outstanding issues.

The leaders also asked finance ministers to decide how much to cut the EFSF's lending rate and how to allow it to take part in bond auctions of distressed sovereigns. The details are to be ready for the next EU summit on March 24-25.

CUT IN EFSF RATE

Euro zone leaders agreed 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.

Asked about the ministers' interest rate discussions, Juncker said As regards adjusting the borrowing rates, the loan granted to Greece will serve as an example.

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, also a recipient of euro zone financial aid, did not get a cut in borrowing costs because it did not want to discuss harmonizing the corporate tax base.

Many economists see lower interest on EFSF loans as key to solving the crisis because together with the primary budget balance and economic growth, it is crucial to the debt outlook and therefore the solvency of particular governments.

Financial markets reacted positively to the surprise outline early on Saturday of a comprehensive package of measures to get on top of the crisis, which included the expanded the size and role of the EFSF and lower borrowing costs for Greece.

But Fitch Ratings said that while a move to allow the EFSF and future permanent fund -- the European Stability Mechanism -- to buy bonds was helpful, it would not resolve the concerns that have driven a year-long market sell off of government debt.

The potential for the EFSF and ESM to buy government debt in the primary market all materially enhance the European policy response to the current crisis, the rating agency said.

However, the policy response to the current crisis outlined by euro area leaders will not resolve market concerns over the 'solvency' of some highly indebted euro area member states.

Financial markets' initial reaction was positive, and the premium investors charge Spain, Portugal and other countries in the firing line in the crisis fell.

Spanish, Italian and Portuguese yield spreads over Bunds were as much as 15-25 basis points tighter on the day and the cost of protecting struggling governments against default fell, led by a full point fall in five-year Greek credit default swaps.

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.

(Editing by Tim Pearce and Rex Merrifield)

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