What steps is euro zone taking on debt crisis?

European finance ministers are meeting on Monday to work out technical details of a comprehensive package of steps to address the euro zone debt crisis, aiming to have the package formally adopted by a European Union leaders' summit this Thursday and Friday.

The outline of the package has been agreed in a series of meetings over the past couple of months.

The EFSF now charges, for variable rate loans, interest equal to three-month Euribor plus 300 basis points for loans up to three years and Euribor plus 400 bps for longer loans. It also charges a one-off 50 bps fee -- well above International Monetary Fund lending rates. Ireland currently pays around 5.8% on its loans, which it says is punitive.

French finance minister Christine Lagarde said the reformed version of the EFSF, capable of buying bonds, would not be operational before this summer.

Officials also stressed that buying on the primary market was to be in response to a crisis, and not a "preventive" measure. French Treasury chief Ramon Fernandez said the EFSF and ESM would not be in a position to intervene on the primary market without a country first calling for help, a plan being negotiated with the European Commission, the European Central Bank and the IMF, and emergency loans being extended to the country. He said the primary market option was only "a complement" which "is to be used in a very limited way".

Euro zone leaders have rejected an idea, backed by the European Central Bank, that the EFSF should buy bonds on the secondary market. The leaders did not agree on other proposals such as having countries buy back their own bonds with EFSF financing, or flexible credit lines modelled on facilities provided by the IMF.

Ireland, which also wanted lower loan costs, has not obtained a reduction on its bailout loan interest because it did not want to "constructively engage" in talks on coordination of a common corporate tax base. The issue is still open and Dublin will make its case again at the summit on Thursday and Friday.

The EU is conducting a new round of bank stress tests, possibly with more transparency, to establish potential losses of banks under various scenarios and their recapitalisation needs; results are expected to be released in June.

Criteria for banks passing or failing the tests are yet to be set. Officials insist this year's tests will be much tougher than last year's, but some analysts doubt they will be tough enough; they will not include assets held in lenders' bank books, allowing peripheral sovereign bonds classified as held until maturity to escape writedowns. Also, the European Banking Authority has said bank liquidity will not be a formal part of the tests, but analysts say liquidity is a crucial issue.

Stress tests published last July initially reassured markets but the positive effect faded after Irish banks, which had done well in the tests, ran into serious trouble.

In an effort to avoid a bailout, Lisbon has presented new austerity steps which have been welcomed by euro zone leaders but criticised by Portugal's main opposition Social Democrats as rushed and inadequate. The opposition has refused to back the steps in parliament and Prime Minister Jose Socrates, heading a minority government, threatens to resign if they are not passed.

A euro zone source said in January that were Lisbon to seek help, the aid plan could be 60-80 billion euros.

As part of toughening the Stability and Growth Pact, the leaders agreed that countries with public debt exceeding 60% of GDP must reduce it annually by 1/20th of the amount above 60%. There is agreement to raise retirement ages in line with life expectancy, limit early retirement schemes and provide incentives for employment of workers over 55.

To make economies more competitive, leaders agreed to give particular attention to ensuring that wages grow in line with productivity, including a review of wage indexation mechanisms.

The proposals, now being debated by the European Parliament which will co-decide the outcome, include new sanctions for rule breakers. Interest bearing-deposits, non-interest bearing deposits and fines of 0.2% of GDP might be imposed on countries which do not reduce budget deficits to reach balance, which are put into an excessive deficit procedure (EDP), and which do not comply with recommendations issued under the EDP.

Another proposal is for a voting mechanism that assumes sanctions are imposed once the Commission proposes them, unless a majority of countries stops them. France and Germany watered this down last October by introducing two intermediate votes before the sanctions stage.

Euro zone leaders have agreed that finance ministers of each country "are expected to, as a rule, follow the recommendations of the Commission or explain its position in writing".

Other proposals include setting up an excessive imbalances procedure for countries based on a scoreboard of criteria, and levying an annual fine of 0.1% of GDP on a country with such imbalances if it fails to address them.