UPDATE 1-Germany wants national funds for euro debtors

Mon Nov 28, 2011 1:30pm EST

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BERLIN, Nov 28 (Reuters) - Germany will propose that euro zone countries set up national funds to house debt exceeding the EU's limit of 60 percent of gross domestic product (GDP) as part of a drive to restore confidence in Europe's finances, Finance Minister Wolfgang Schaeuble said.

The idea is a variation on a proposal put forward earlier this month by the German "wisemen" council of economic advisers to the government, who suggested setting up a central joint liability fund for high debtors in the single currency bloc.

"Beyond budget discipline, we need steps that win back the lost confidence of the financial markets," Schaeuble told reporters from the foreign press association in Berlin.

"Therefore we will propose that all members of the euro zone commit to managing the debt that exceeds the 60 percent of GDP threshold in the Stability and Growth Pact, in their own fund which is covered by their own revenues," he said.

Schaeuble acknowledged that the separation of excess debt into a sort of "bad bank" for governments would not relieve euro zone members of their obligations to pay it off.

But he said the step could help focus euro states on bringing their overall debt down below EU limits over a 20-year horizon, strengthening market faith in Europe's resolve.

In an hour-long question and answer session, Schaeuble also rejected the idea of jointly issued euro bonds before Europe had made substantial progress towards fiscal integration.

"Euro bonds means collectivizing liabilities. And Germany would be overwhelmed with the liabilities of the entire euro zone. So would the Netherlands, Finland, Luxembourg, Austria and France," Schaeuble said when asked how soon euro bonds could be introduced in an ideal scenario.

"It has to happen in the right order, then we'll see. We'll debate this later, not now."

Schaeuble also reiterated, ahead of a summit of EU leaders on Dec. 9, that Germany wanted to press ahead with fiscal integration among all 27 members of the EU via changes to the bloc's Lisbon Treaty, but acknowledged that other solutions could be envisaged if that proved impossible.

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