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Euro zone needs 'grand bargain' of QE, fiscal easing - Poland's Belka

Marek Belka, Poland's central bank governor, smiles as he listens to a question during a news conference at the bank's headquarters in Warsaw October 8, 2014. REUTERS/Slawomir Kaminski/Agencja Gazeta

By Marc Jones and Patrick Graham

LONDON (Reuters) - The euro zone needs a "grand bargain" between Germany and France to pave the way for substantial new fiscal and monetary stimulus to revive its economy, the head of Poland's central bank said on Monday.

Marek Belka said agreement between the euro zone's two biggest economies, currently at odds over France's budget deficit overshoot, could make it possible for the European Central Bank to embark on an ambitious programme of quantitative easing, or buying government bonds.

Belka, previously the International Monetary Fund's European head, also said he was comfortable with market expectations of another 50 basis point cut to Poland's already record low 2 percent benchmark interest rate before the end of the year.

Poland has been one of the few European economies to escape recession since the euro zone's debt crisis erupted five years ago, but with the economy of its main trade partner Germany stumbling, concerns are mounting again.

"It is very hard to be optimistic," Belka, returning from the IMF's meetings of global financial leaders in Washington, told Reuters in an interview. "The mountain of (euro zone) debt is not decreasing, deleveraging in the banks is going on at full speed, so you need something more than just muddling through."

Belka said that even maximum estimates of around 1 trillion euros ($1.3 trillion) attached to the ECB's current plans for new targeted cheap loans and purchases of packaged debt would not suffice.

It would only take the ECB's balance sheet back towards where it was a year ago, and not provide the additional boost Europe currently needs, he said.

"Doing more would mean buying government bonds. Maybe it could be possible as part of a bigger package, a 'grand bargain'. The French defy French identity, French tradition, the Germans do the same and we save the euro," he said.

It was a direct call for France to push through long-promised spending cuts and for Germany to do more in terms of public spending that could end up being beneficial elsewhere in Europe too.

"Even if we are not talking about an existential threat to the euro, something has to happen to give the euro zone a push out of stagnation. It is not a rosy picture."

RATE EXPECTATIONS

Poland cut its own interest rates by a larger-than-expected 50 basis points last week and signalled more quick-fire easing could follow as the euro zone's weakness and the Ukraine crisis constrain its domestic economic growth.

Asked whether he was comfortable with the further half percentage point in Polish rate cuts markets have moved towards pricing in by the end of this year, Belka simply said: "Yes."

"But of course what happens depends on a number of factors including the next central bank inflation projection." Those forecasts are due at a Nov. 5 meeting.

Poland and the rest of eastern Europe are also waiting on the results of the ECB's bank stress tests due on Oct. 26, the culmination of a year-long process. The tests will have a big impact on the region if euro zone parent banks that need to improve their finances opt to sell their eastern Europe subsidiaries.

Belka said he didn't expect many sell-offs in Poland or other larger markets like the Czech Republic, but acknowledged there were places where there was likely to be a shake-out.

"There are problems of course in some smaller countries, especially on the Balkan peninsula. And yes we have signals from some of those countries - I will not name them - that banks are looking to sell," he added.

(Editing by Ruth Pitchford and Mark Trevelyan)