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EU policy makers play down monetary fund idea

By John O'Donnell and Krista Hughes

LUXEMBOURG/FRANKFURT (Reuters) - European policy makers played down on Tuesday the idea of creating a European Monetary Fund, saying it was at most a long-term project that did not offer a solution to Greece's immediate debt problems.

Influential German central bank chief Axel Weber, seen as front-runner to be the next president the European Central Bank, branded discussion of a fund that could aid euro zone countries in financial distress "counterproductive."

"It's not helpful to talk about ways to institutionalize help when the question is how to implement the (Greek) budget reforms," Weber told a news conference, saying the "no bailout clause" was central to European monetary union.

His concerns echoed strong criticism by ECB Executive Board member Juergen Stark, who said on Monday that such a fund would penalize countries with solid finances and encourage wayward spending.

German Chancellor Angela Merkel defended the idea of a mechanism to deal with a member state's insolvency in an orderly manner but said it would require a change in the EU's Lisbon Treaty and was a "last resort" for the future.

Dutch Finance Minister Jan Kees de Jager questioned whether a new European institution was needed and said other options, including recourse to the International Monetary Fund, should be considered first.

French Finance Minister Christine Lagarde said the idea of such an EU lender of last resort was interesting but "does not appear to me to be an absolute priority in the short term.

Merkel and Jean-Claude Juncker, chairman of the Eurogroup of finance ministers of the 16-nation euro area, both said after talks in Luxembourg that Greece did not need financial support.

"I am strongly convinced that Greece will not require help," Juncker told reporters. "The Greek government's program will be strong enough to eliminate any element of irrational behavior in financial markets."

AMBIGUITY

Merkel said Greece's latest austerity plan announced last week, involving cuts to public sector pay and new taxes, had begun to convince markets.

"Greece has won some trust back through the steps taken by its government," she said, noting that a Greek bond issued last week had been substantially oversubscribed.

Their comments highlighted the ambiguity of European Union pledges of support for Greece, which have not been underpinned by any public commitment to financial assistance.

European Commission President Jose Manuel Barroso told the European Parliament that the EU executive and euro zone governments were working on a mechanism to help Greece if necessary.

The premium investors demand for holding Greek debt rather than benchmark German bonds crept up to around 300 basis points on Tuesday following comments by credit ratings agency Fitch.

Fitch said Greece's BBB+ rating, with a negative outlook, did not factor possible EU help because it was too uncertain, and there were still questions over whether Athens can implement its fiscal austerity measures over the longer term.

"The fact we don't have any money on the table from the euro area ... there is slight ambiguity, leaves enough uncertainty in our minds to say that we're not factoring a bailout into the Greek rating at this point in time," Paul Rawkins, senior director at Fitch, told a conference in London.

Greek Prime Minister George Papandreou, seeking help to lower his country's crippling borrowing costs, was due to meet U.S. President Barack Obama at the White House later on Tuesday.

Greece's debt agency chief said the country, which needs to roll over some 20 billion euros ($27.21 billion) in debt between April 20 and end-May, was not planning a new issue soon.

Athens raised 5 billion euros with a 10-year syndicated bond last Thursday but had to offer a yield of 6.4 percent, twice what Germany pays to borrow.

Fitch said it had no plans to change its negative outlook on Portugal's AA credit rating, criticizing what it called Lisbon's "pedestrian approach" to fiscal consolidation.

Portugal announced plans on Monday to cut its deficit to below the EU limit of 3 percent of gross domestic product in 2013 from 8.3 percent this year through spending curbs and tax increases.

(Additional reporting by Sudip Kar-Gupta in Paris, Michelle Sinner in Luxembourg, Marcin Grajewski in Brussels, Gilbert Kreijger in Amsterdam and Ian Chua in London; writing by Paul Taylor; editing by Stephen Nisbet)

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