The euro zone's rescue fund, the European Financial Stability Facility (EFSF), will be allowed to buy bonds in the primary and secondary markets, according to a document setting guidelines for the fund seen by Reuters correspondents.
The news sent the euro to the day's high against the dollarand European stocks pared some of their lossesfollowing the report.
The euro fell Thursday afternoon after a report in German newspaper Die Welt that the government did not rule out postponing a European Union summit planned for this weekend because of disagreements over the EFSF .
If an euro zone country has a track record of good borrowing, has no bank solvency problem and European Central Banks and euro zone deputy finance ministers approve, then the EFSF will be able to buy the country's bonds from the secondary markets, according to the guidelines.
The document said only countries which respected their deficit-cutting commitments under the EU budget rules, the Stability and Growth Pact, would be eligible for such help.
A memorandum of understanding with the country requesting such help would be prepared by the European Commission and the European Central Bank within one to two days, the document said.
The EFSF could then sell the bonds back on the market, once prices went up, but consider that this could potentially disturb the issuance of the country on the primary market.
The EFSF could also hold the bonds to maturity, but this would reduce its lending capacity, the document said, or sell them back to the issuing sovereign to reduce the debt burden the government has to deal with.
Finally the EFSF could use the bonds for repos with commercial banks, according to the document, which is to be discussed by euro zone finance ministers at a meeting on Friday.
European stocks spent the morning deep in the red as hopes that a summit of euro leaders on Sunday would make significant progress towards solving the debt crisis faded.
French President Nicolas Sarkozy and German Chancellor Angela Merkel met Wednesday evening to try and break a deadlock over increasing the EFSF's firepower.
Bond-Buying in Primary Markets Too
The European Financial Stability Facility (EFSF) will be able to buy bonds at primary auctions at market price and, as a general rule, no more than half of the issue on offer, guidelines for the EFSF obtained by Reuters also showed.
The EFSF will be able to participate in auctions of those sovereigns who are either already under an emergency loan program or have an EFSF precautionary credit line. Money invested in the bonds will be part of the overall existing program or credit line.
"As a common point, the intervention of EFSF would be at market price," the guidelines, to be discussed on Friday by euro zone finance ministers, said.
"As already expressed, it seems more adequate to consider that participation in primary market program would take place only if a reasonable participation of private investors at a rate not excessively above the EFSF funding rate as the Reference Funding Rate is possible," the document said.
"The analysis whether a rate is excessive should be based on an assessment of the financing needs and gap of a country in the context of the overall monitoring, as well as an assessment of current market conditions," it said.