Leaders want end to default swaps

Berlin/Vienna: Euro zone countries in breach of the group's rules on deficits and debt should face "daunting" sanctions, including the confiscation of European voting rights, France's finance minister said.

"We need to check how best to impose sanctions" on fiscal miscreants, Christine Lagarde yesterday told German daily Frankfurter Allgemeine Zeitung.

"They must be daunting. We could for example consider withholding money from the [EU] structural and cohesion funds... then there is the possibility of removing voting rights," she added.

The possibility of expelling a country from the euro area on a temporary basis would, however, be "complicated," she said.

Under the EU's Stability and Growth Pact, countries are obliged to keep public deficits below three per cent of gross domestic product (GDP) and debt below 60 per cent of GDP.

Hammer blow

In theory, transgressors can be fined but little in practice has been done.

"Today, we have the possibility of fines but it seems pretty strange to me to impose fines like a hammer blow on a country that already has huge financial difficulties," she said.

Lagarde denied that EU leaders panicked on May 9 in hastily pulling together a near trillion-dollar loan package to bolster euro countries that could find themselves in difficulties similar to those suffered by debt-laden Greece.

"We were close to a situation like we had after the collapse of Lehman Brothers," she said, referring to the fall in 2008 of the giant US investment bank that triggered a liquidity crisis and turmoil on the financial markets.

Also calling for stricter rules on deficits in the wake of the Greece crisis was Austrian Finance Minister Josef Proell, who pushed for a "European debt brake" system, like Germany's law that limits the deficits run up every year.

Budgetary discipline

"This would lead to a clear capping of new debt, to stricter budgetary discipline and finally to balanced budgets in Europe," Proell said in an interview with Die Welt daily.

Both Proell and Lagarde were due to attend a crunch meeting of euro zone finance ministers in Brussels later yesterday that was to seek to thrash out ways to shore up the falling euro currency amid the ongoing Greek debt drama.

Inflation will be kept in check in the euro zone but governments must act quickly to rein in excessive budget deficits, European Central Bank Executive Board member Gertrude Tumpel-Gugerell was meanwhile quoted as saying.

"Price stability is secured, and you can trust that it will remain so in the future," Tumpel-Gugerell was quoted as saying in an interview with Austrian magazine Top-Gewinn, excerpts of which were released yesterday.

Frankfurt (AFP) Greek Prime Minister George Papandreou said several European leaders will press for a ban on certain arcane financial tools tied to the 2008 global economic meltdown, in an interview published yesterday.

Papandreou told Germany's daily Handelsblatt that he, German Chancellor Angela Merkel, French President Nicolas Sarkozy and eurogroup chief Jean-Claude Juncker had written to US President Barack Obama calling for an end to controversial credit default swaps (CDS).

"The G20 countries plan to discuss it," he said.

In March, Germany said it was working with France on rules for derivatives markets including CDS, the lucrative trade in complicated insurance investments against the risk of a debtor defaulting that are favoured by speculators.

They were originally aimed at covering against the risk of a debtor defaulting but Athens has blamed the product for a deterioration in its prospects of tackling its massive debt crisis which has threatened to destabilise the euro zone.