Spanish 10-year bonds yielded 5.71 percent today, down from a peak of 7.62 percent on July 24. Italian 10-year yields have fallen to 5.08 percent from 6.60 percent and the euro has risen 7.6 percent to $1.2971 over the same period.

The ESM will replace the temporary European Financial Stability Facility, which has spent 192 billion euros of its 440 billion euros on loans to Ireland, Portugal and Greece. The two funds will run in parallel until the EFSF is phased out in mid-2013.

Controlled by euro finance ministers, the ESM can lend directly to governments, intervene on bond markets, offer credit lines and provide loans that can be used to recapitalize banks. It would be authorized to pump capital into banks directly only once the euro zone sets up a central supervisor, possibly in 2013.

The ESM inherited those powers from the temporary fund. For now, it will go without two other EFSF tools that have yet to be used: debt-insurance certificates and co-investment vehicles that were designed to use leverage to multiply their impact.

Finance ministers touted Spain's economic overhaul, declined to press the Spanish government for more budget cuts and said a bank-aid program set up in July will cost far less than the 100 billion euros allocated for it. Payouts under that program will be handled by the ESM starting in November.

“Spain is also suffering under the problem of contagion, like other countries, from speculation that's the result of the uncertainty surrounding the euro area as a whole,” German Finance Minister Wolfgang Schaeuble said. “But Spain doesn't need an assistance program.”

Street protests against austerity and three regional election campaigns have played into the Spanish government's decision to hold off seeking a full aid package. While Spain is awaiting a clearer sense of what Europe would want in return, it ruled out further budget cuts.

Spanish Economy Minister Luis de Guindos defended the 2013 budget draft against assertions by the Spanish central bank and some European officials that it relies on optimistic economic assumptions in order to squeeze the deficit down to a European target of 4.5 percent of gross domestic product.

“The budget for next year has been put on the table, it is a significant effort in terms of budget adjustment,” de Guindos told reporters in Luxembourg.

Asset Sales

Ministers said the next move on Greece is in the hands of the so-called troika of officials from the European Commission, ECB and International Monetary Fund, now in talks with the Greek government over budget cuts, asset sales and economic reforms.

The holding pattern on Greece comes a day before German Chancellor Angela Merkel, the dominant figure in European bailout politics, makes her first trip to Athens since the Greek government uncovered hidden holes in its budget in October 2009.

Prime Minister Antonis Samaras's coalition is deliberating internally and wrangling with the creditors to put together 13.5 billion euros in savings, the condition for tapping the next 31 billion euros in loans. Greece has been promised 240 billion euros since the crisis erupted.

Greece is undertaking “a lot of efforts, it's very difficult down there,” Luxembourg Finance Minister Luc Frieden said. “If we need to give them additional time, if that does not require a lot of additional money, we should support Greece. However, it's not a one-way street.”

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