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By Noah Barkin and Gernot Heller
BERLIN, March 27 (Reuters) - Germany warned on Friday that surging debt levels could threaten the stability of the euro currency and lay the groundwork for future crises if the world's leading economies were not careful.
The comments, by German Finance Minister Peer Steinbrueck, were the strongest yet by a leading politician from Europe's largest economy and underscored just how worried Berlin has become about rising debt levels within the euro zone and beyond.
The euro fell sharply against the dollar on Steinbrueck's remarks, reflecting nervousness in markets about the 16-nation currency bloc and a divergence in the finances of its members. "Germany, as a member of the EU, has a massive interest in the credibility of the Stability and Growth Pact, which as you know is not taken so seriously by some," Steinbrueck said, referring to agreed European limits on debt and deficits.
"If it is not taken seriously, I am telling you, the euro will have trouble one day in terms of its own credibility and stability," he told the Bundestag lower house of parliament, saying the issue was of "decisive importance" for the bloc's citizens and financial markets.
Speaking later at a conference with his Swedish counterpart Anders Borg, Steinbrueck expressed doubts about whether a plethora of debt-financed stimulus packages in Europe, the United States and Asia could put a stop to the worst global downturn in 80 years.
He warned that the debt could eventually become too much of a burden for capital markets, aggravating global imbalances and possibly "pre-programming the next crisis".
The euro, which has climbed steadily against the dollar since the beginning of the month, was on track for its biggest one-day fall in over a month. It slid by over two cents on Steinbrueck's comments to an intraday low of $1.3296 -- its weakest level since March 18.
OBAMA STIMULUS
Steinbrueck singled out U.S. President Barack Obama's $787 billion economic stimulus plan, saying the debt issued to finance it risked crowding the market -- a phenomenon he said could affect China, the biggest buyer of U.S. debt, and influence currencies.
This in turn, raised questions about consequences for the euro currency.
Under the EU's Stability and Growth Pact, member states must limit their deficits to 3 percent of gross domestic product (GDP), but nations across the bloc are above or at risk of busting through this ceiling as they step up spending to shield their economies from a sharp global downturn.
Germany, which has introduced two stimulus packages worth an estimated 81 billion euros, has said its own deficit will rise to about 4 percent of GDP next year but is vowing to push it back down to 3 percent in 2011, according to documents seen by Reuters last month.
It is concerned that other member states, worried about rising unemployment and social unrest, could be reluctant to return quickly to the same disciplined approach.
Sweden's Borg also expressed concerns, pointing to Britain's first failed government bond auction since 2002 as an alarm bell to other countries.
Britain suffered the failed auction on Wednesday when bids fell more than 100 million pounds ($143.2 million) short of the 1.75 billion the government was trying to raise.
"What was experienced in London was a warning signal. We must watch this very carefully," Borg said at the event hosted by the German finance ministry. (Reporting by Noah Barkin, Gernot Heller and Madelin Chambers; Editing by Victoria Main)