EU leaders to ease deficit strictures due to crisis

By Crispian Balmer

PARIS (Reuters) - Europe's most powerful leaders opened the way on Saturday for EU governments to breach deficit limits, saying the financial crisis was so severe they could waive their usual strict application of budget rules.

It was the first time the EU appeared ready to invoke a 2005 clause that allows countries to bend the rules laid down in the Stability and Growth Pact if they fall victim to exceptional events outside their control.

President Nicolas Sarkozy met the leaders of Germany, Britain and Italy on Saturday to discuss the credit crisis and draw up a list of proposals to overcome the mayhem that has pushed several European banks close to collapse.

"...The application of the Growth and Stability Pact should reflect the exceptional circumstances in which we find ourselves," Sarkozy told a news conference after the meeting.

European Bank President Jean-Claude Trichet, European Commission President Jose Manuel Barroso and Eurogroup Chairman Jean-Claude Juncker also attended the meeting and endorsed the move by signing a statement that used very similar wording.

France would almost certainly be one of the first countries to benefit from any relaxation in the EU rules, which stipulate that governments should keep their budget deficit below three percent of gross domestic product.

Budget Minister Eric Woerth confirmed for the first time on Friday that the French economy was in technical recession and economists say official government targets of a deficit-to-GDP ratio of 2.7 percent in 2008 and 2009 are overly optimistic.

Waiving the Stability Pact rules means that France would avoid any reprimand that could ultimately lead to heavy fines.

HEFTY BILLS

Other EU countries are also seeing sharp economic slowdowns exacerbated by the woes of the financial sector, and some of them face hefty bills trying to rescue stricken banks.

Germany, Britain, Belgium, the Netherlands and Luxembourg all rushed to save banks this week, pumping billions of pounds and euros into companies to keep them afloat.

Saturday's meeting made clear that the European Union would not be setting up a pan-national bank bailout fund, along the lines of the U.S. $700 billion fund, but the leaders said they would move fast to try to alleviate the crisis.

In a potentially crucial decision, they called for mark-to-market accounting rules to change by end of this month.

These rules force banks to price their assets frequently even if they intend to hold them for a long time. Some assets, such as mortgage-backed securities, have become untradeable, making it hard to calculate their value and the mark-to-market rule is blamed by critics for causing destabilizing writedowns.

The leaders also called for harmonized rules on bank deposit guarantees, hoping to avoid the sort of splits that emerged this week when Dublin announced it was guaranteeing all its national deposits, causing a flow of capital from British to Irish banks.