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Bonds News

WRAPUP 2-Euro policymakers inject cold reality into EMF debate

* Any fund would protect euro zone as a whole - Juncker

* ECB can’t bail out states in budget trouble - Mersch

* Merkel wants stiffer sanctions for budget sinners

* Dutch PM says IMF should be considered for Greece

* Four nations demand EU probe of CDS “speculation”

(adds Merkel, Balkenende, Greek strike, CDS call)

By David Stamp and Philip Blenkinsop

BERLIN/LUXEMBOURG, March 11 (Reuters) - EU policymakers injected a dose of cold reality on Thursday into talk of creating a European monetary fund, questioning who would pay for it and stressing the principle of no bailouts for countries in trouble must stay.

Eurogroup Chairman Jean-Claude Juncker said such a fund should protect only the interests of the entire euro zone, not any individual member of the currency bloc, while ECB Governing Council member Yves Mersch said central banks weren’t in the business of budget bailouts.

With Greece battling a debt crisis, German politicians in particular have pushed the idea of a rescue fund which euro zone countries could tap on tough conditions if they faced default.

German Chancellor Angela Merkel, who has endorsed the idea in principle, said on a visit to the Netherlands that existing EU sanctions were not sufficient to make member states respect fiscal discipline.

“In the long run we need stronger sanctions to make the Stability and Growth Pact work,” she said.

Dutch Prime Minister Jan-Peter Balkenende, whose country is even more fiscally conservative than Germany, said help from the International Monetary Fund should be considered as a possible solution for Greece. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Europe's fight with debt [ID:nLDE6211JD] Graphic on euro zone debt crisis r.reuters.com/fyw72j Q+A on European Monetary Fund idea [ID:nLDE6280CY] Story on credit default swaps [ID:nLDE62A1J0] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> Germany and France, the two leading euro zone economies, strongly oppose IMF involvement, arguing that it would suggest the currency bloc was unable to solve its own problems. That is the main reason for talk of a European fund of last resort.

But Juncker and Mersch, both Luxembourgers, made clear many practical problems would have to be overcome if a European fund were ever to become reality.

THOUSANDS OF QUESTIONS

Juncker, who speaks for euro zone finance ministers, said the principle that no member state could be bailed out by others if it ran into budget problems was sacrosanct. This was enshrined in the Maastricht Treaty creating the common currency.

“What is planned with the creation of the European Monetary Fund -- and there are thousands of questions to clarify -- is not a skirting around of the no-bailout clause,” he told Germany’s NDR radio.

“It would not be an instrument for Greek-style solutions, were this to be necessary, but a somewhat broader instrument that would protect the entire euro zone, not only one country,” he said in a telephone interview.

Greek public and private sector workers staged the second one-day general strike in a month against the government’s latest austerity plan, meant to reduce this year’s deficit to 8.7 percent of GDP from a towering 12.7 percent in 2009.

Police clashed with stone-throwing youths in Athens as tens of thousands marched in protest, halting public transport, grounding flights and shutting down government offices.

EU finance ministers are expected to endorse Greece’s austerity plan next week, but it will take similarly painful cuts for several years to reach the EU deficit ceiling of 3 percent and start to reduce a public debt of 120 percent of national output.

CDS SPECULATION

The leaders of France, Germany, Luxembourg and Greece called in a joint letter to European Commission President Jose Manuel Barroso for an urgent investigation into the role of speculation in credit default swaps in recent debt market turbulence.

Greece has blamed so-called naked CDS contracts, where investors buy default insurance without owning the underlying debt instruments, for exacerbating attacks on its debt.

Mersch made clear that the European Central Bank would not provide emergency funding for countries in a budget crisis. He also appeared to doubt whether euro zone citizens would want their governments to stump up the capital for a monetary fund.

“I do not see any place for central bank money to bail out fiscal deficits. If there would be taxpayers’ money I would have no comment because it would not be my business,” said Mersch, who heads Luxembourg’s central bank.

On Wednesday, ECB President Jean-Claude Trichet did not rule out the EMF idea in principle but said bank policymakers would need to look at the proposal in more depth. [ID:nLDE62A0BN]

Trichet said calling such a fund the European Monetary Fund would not necessarily accurately reflect its role, which he saw as providing financial help with strict conditions.

Juncker said euro zone finance ministers should step up their surveillance of countries’ finances. “We must expand our monitoring mechanisms in the Eurogroup,” he said, noting that Greece had steadily lost its competitive edge since joining the euro zone.

“Differences in competitiveness between countries in the euro zone were never a real problem,” he said. However, these gaps could have a greater effect in future and the Eurogroup would discuss this next Monday. (Additional reporting by Gilbert Krijger in The Hague, Renee Maltezou and Ingrid Melander in Athens, Sophie Taylor in Paris; Writing by David Stamp and Paul Taylor; Editing by Susan Fenton)

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