EU finmins to narrow options on tighter budget rules

BRUSSELS (Reuters) - European Union finance ministers are likely to back Monday changes to budget rules that will seek to discipline countries for having excessive debt as well as excessive deficits in future.

A "Task Force" of ministers is to meet Monday evening in Luxembourg to debate ways of strengthening economic governance in the 27-nation bloc in general and the euro zone in particular to prevent future debt crises, like the one triggered by Greece.

The broad proposals they approve will be restricted only to moves that do not require changes to EU treaties -- difficult to make in practice -- and will be put to a summit of the bloc's leaders for approval on June 17.

Sources familiar with the preparatory work for Monday's meeting told Reuters that work remains in its infancy and even those put to the June summit would remain very broad. Detailed work over the summer would put more meat on the bones.

"As it is the first time they (the ministers) are discussing it in substance, anybody who thinks that they will come out of the room with new rules would be stupid," one euro zone source involved in the preparation of the meeting said.

"I expect a narrowing down of political choices," the first source said.

Task Force sources said there was general agreement the revised rules -- the Stability and Growth Pact -- should put more emphasis on reducing debt and firm up the requirement of reaching a budget balance or surplus over the medium term.

They said there was backing for the group to discuss imposing sanctions earlier on countries who break the rules as well as controversial early EU peer reviews of national budgets.

"If we start with smart and easy sanctions at an early stage it is much more credible than when somebody is already so deep in trouble that adding more penalties is not credible because it would bankrupt them," the first source said.

But German proposals to discuss a mechanism for an orderly sovereign debt default by a member state would not be on the table at this stage.

"The orderly default of a euro zone country is not part of the debate right now, I don't think it makes any sense in this context," a second euro zone source said.

PEER PRESSURE

The European Commission and Germany have already presented their proposals and other countries have been invited to do so too.

There was backing for discussion of a more controversial proposal that ministers should consult early versions of their future budgets with EU peers before they submit the drafts to national parliaments for approval.

"Do we influence each other or just communicate with each other? Are we prepared to leave Brussels after such a discussion, go home and say: 'yes, my budget will be different because of concerns that have been voiced on the EU level?' I think there is such readiness," the first source said.

Ministers will also debate which of the new rules should apply to all members of the bloc and which only to the euro zone.

Sources said the idea of a common euro zone bond, floated by EU president Herman van Rompuy, who chairs the Task Force, did not move forward because of fierce opposition from Germany.

Euro zone finance ministers, meeting before the Task Force, are likely to finalize the technical aspects of the special purpose vehicle (SPV) which, if needed, could borrow up to 440 billion euros against euro zone country guarantees.

The vehicle is part of a joint package with the IMF, amounting to a total of 750 billion euros, for euro countries cut off from markets -- at the moment just Greece.

The discussions focus on whether national parliaments of countries making up the SPV should vote before the SPV lends money and the credit rating it should have.

The first source said euro zone finance ministers have agreed the SPV should have a AAA rating.

"The difficult discussion has already taken place, now there are minor issues really of technical nature, they will be cleared by then, the expectation is that all the documentation will be finalized by Friday," a fifth euro zone source said.

"There is nothing hugely politically controversial, it's just about finding the right solutions to have the SPV as flexible as required by markets participants."

(Reporting by Jan Strupczewski, editing by Patrick Graham)