* EU finance ministers discuss debt, deficit rules
* Tough discussions likely on the details
By Julien Toyer and Marcin Grajewski
BRUSSELS, Sept 27 (Reuters) - European Union finance ministers may struggle to agree on ways to toughen debt and deficit rules in talks on Monday aimed at regaining confidence in the euro zone.
Euro zone sources said there was broad agreement on the need to make the EU budget rules tougher, but a difficult discussion was likely over the details of the draft proposals.
"Everyone was happy...as long as there were no specifics on the table, so there was this illusion of a great consensus emerging," said one euro zone source.
"Now we are actually talking hard and fast rules, and three-quarters of the countries discovered that they actually have a problem with what is discussed... I expect this will require some hard negotiations at the level of the Council (of ministers)."
For example, the tougher rules, aimed at preventing another sovereign debt crisis like the one sparked by Greece, do not include the suspension of EU funds to euro zone countries that break them, as is sought by Germany.
In a letter obtained by Reuters to those meeting on Monday, German Finance Minister Wolfgang Schaueble said he wanted the EU's budget rules to be given "more bite." He said the rules should include quasi-automatic sanctions to prevent and correct excessive deficits and enforce fiscal governance in the EU, which has been rocked by Greece's debt crisis. [ID:nLDE68Q13G]
Some EU sources said the previous reform of the Stability and Growth Pact in 2005, which gave budget sinners more leeway, had been given the green light by politicians before more technical proposals emerged.
"Now we have no political agreement. There are broad guidelines but no agreement on many things, so the Commission is putting forward proposals that have not been approved or given even general approval at the political level," one said.
Financial markets would be likely to react nervously to any lack of progress, especially in the wake of recent worries over Ireland's public finances, further stirred on Monday after Moody's slashed its ratings on nationalised lender Anglo Irish Bank [ANGIB.UL]. [ID:nLDE68Q15A]
Leaders' calls for sweeping changes earlier this year helped to reassure investors, but enthusiasm for big changes has waned as the currency area posted strong growth in the second quarter.
The European Commission is due to formally present proposals on Wednesday for revamping the Stability and Growth Pact, the EU's public finances rulebook, and the finance ministers will give the EU executive their guidance before the announcement.
"Strengthening the Pact is important for both increasing the credibility of the agreed co-ordinated fiscal exit strategy and avoiding a repetition of past mistakes," the Commission said in the proposal, obtained by Reuters.
SANCTIONS SOUGHT
According to the proposals obtained by Reuters, the European Commission wants euro zone countries to face sanctions if they ignore the existing, but toothless, rule that governments should strive towards a budget close to balance or in surplus by reducing deficits by 0.5 percent of GDP a year.
If a country does not adhere to that rule, it would first be warned by the Commission. If that did not help, it would have to make an interest-bearing deposit of 0.2 percent of GDP.
For countries that have budget deficits above 3 percent of GDP, the EU ceiling, the opening of what the EU calls the excessive deficit procedure would now entail making a non-interest bearing deposit of 0.2 percent of GDP.
"A non-interest bearing deposit amounting to 0.2 percent of GDP would apply upon a decision to place a country in excessive deficit, which could be converted into a fine in the event of non-compliance with initial recommendations to correct the deficit," the Commission proposal said.
So far such sanctions were only an option at the end of the procedure, which could take years. The deposit would be converted into a fine if the rule-breaker did not follow the recommendations of EU finance ministers to reduce the deficit.
To put more focus on high debt levels in some euro zone countries, the Commission proposes that those who have their public debt to GDP ratio above the EU limit of 60 percent of GDP would have to reduce it by one-twentieth of the excess a year.
If not, the country would be put in the excessive deficit procedure, which entails making a non-interest bearing deposit of 0.2 percent of GDP at the start.
Finally, to minimise the risk of crises triggered by macroeconomic imbalances such as housing bubbles in Ireland or Spain, the Commission proposes monitoring the economies of EU members to detect such emerging imbalances.
In the case of severe imbalances, countries would be put into an Excessive Imbalances Procedure entailing recommendations from EU finance ministers on how to reduce the imbalance.
If that advice were ignored, euro zone countries could be fined 0.1 percent of GDP a year until they do as they are told. (Reporting by Jan Strupczewski, Marcin Grajewski and Julien Toyer, editing by Hugh Lawson)