MEXICO CITY (Reuters) - Germany may not be ready to back an increase in the euro zone's bailout fund at a summit next week, delaying progress towards building up nearly $2 trillion in firepower to tackle fallout from Europe's sovereign debt crisis.
Finance leaders from leading economies, meeting in Mexico City this weekend, are trying to secure a massive international fund to prevent the crisis from spreading throughout financial markets and threatening a fragile world recovery.
They are demanding that Europe increase its own firewall before the Group of 20 economies agree to contribute more resources to the International Monetary Fund. As Europe's paymaster, Germany's support for a larger European fund is critical, and G20 members are piling on the pressure.
"I do want to encourage Germany to take that leadership role very seriously and come up with an overall euro zone plan," said Canada's Finance Minister Jim Flaherty.
G20 finance leaders are trying to line up all the extra resources by April. It would mark their boldest efforts since 2008 when the G20 mustered $1 trillion to rescue the world economy from the credit crisis, which blew up in the United States and caused the worst recession since the 1930s.
Recovery since then has proved halting and chaos has spread to Europe where highly indebted countries -- Greece, Ireland and Portugal -- have been locked out of debt markets and forced to seek bailouts. Italy and Spain also are under threat.
But Germany so far has opposed building up the region's bailout fund, fearful that it would ease pressure on countries to carry out first tough fiscal measures and the deep economic reforms needed to bring their budgets under control.
German Finance Minister Wolfgang Schaeuble told bankers in Mexico City that he was worried the fundamental problems in Europe had not been solved.
Euro zone officials said they doubted Germany would shift ground before a March 1-2 summit of European leaders where the bailout fund is on the agenda. But they and international diplomats said they expect a softening of Berlin's tone once it clears political obstacles in coming days and weeks.
Under discussion is merging a temporary bailout vehicle, the European Financial Stability Fund, with a permanent one, the European Stability Mechanism, to create a 750 billion-euro ($1 trillion) war chest.
In addition, the IMF is requesting $500-$600 billion in new resources from countries around the world to top up its current $358 billion.
In all, that would total around $1.95 trillion.
Olli Rehn, European Commissioner for Economic and Monetary Affairs, said more funds are essential. "In order to overcome the crisis, you have to get ahead of the curve and have a big enough bazooka," he told reporters.
"The negotiations are now going on, I am confident that in the course of March, we will be able to take a decision on the reinforcement of the combined lending capacity of the ESM and the EFSF," he said.
One euro zone official said a deal is unlikely at next week's EU summit though it may reveal some flexibility by Berlin: "What we can expect, at most, is a reference in the conclusions suggesting Germany is not closing the door."
GERMANY NEEDS TIME
Germany appears to be playing for time. It faces a critical vote on Monday to win support in the German parliament for Greece's second rescue package. Many Bundestag members are skeptical that Greece can meet tough fiscal conditions required to bring its public debt down to 120 percent of GDP by 2020.
Similar votes are scheduled in the Netherlands and Finland next week. Germany also wants to see whether enough investors sign up for Greece's debt swap, which Athens wants to complete by March 12, a euro zone official said.
"Most euro zone countries are ready to move now, but I am afraid that Germany will need more time to agree to the increase, mainly to be able to better manage the Bundestag," one euro zone official said.
After mounting these political hurdles, international diplomats and euro zone officials expect Germany will concede to an enlarged EU bailout fund. That in turn would clear the way for G20 countries to agree to add more resources to the IMF when they next meet in Washington at the end of April.
Canada's Flaherty said the G20 must answer this weekend the question of when Europe will boost its firewall. The EU's Rehn said the G20 would probably lay out a roadmap for getting to a follow-up agreement on boosting the IMF resources by late April.
The United States has said it will not provide more funds for the IMF. But it is not standing in the way of other countries lending to the Fund and is keeping up the pressure on Europe to put forward first more of its own money.
"I hope that we're going to see, and I expect we will see continued efforts by the Europeans ... to put in place a stronger, more credible firewall," U.S. Treasury Secretary Timothy Geithner said on Saturday.
Policymakers said they were hopeful that putting in place a strong firewall against further crisis in Europe would help strengthen the world economy.
"The economy is somewhat picking up in the world as a whole including Japan and (we) want to put an end to the Europe crisis in the early spring and to accelerate the global economic growth," Japan's Finance Minister Jun Azumi said.
($1 = 0.7428 euros)
(Additional reporting by Louise Egan, Glenn Somerville, Tetsushi Kajimoto,; Alonso Soto and the G20 reporting team.; Writing by Stella Dawson; editing by William Schomberg)
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