EU seeks safety net deal, Germany sets cuts

European finance ministers sought to calm nervous markets Monday by nailing down details of a massive financial safety net for the euro zone as Germany unveiled new budget cuts it hopes will set an example for its partners in the bloc.

German Chancellor Angela Merkel's coalition agreed to pursue savings of 11.2 billion euros next year, part of a multi-year package of 80 billion designed to restore investor confidence in the finances of the 16-nation currency bloc.

Citing diary problems, however, Merkel postponed crucial talks with French President Nicolas Sarkozy on reforming the euro zone's governance, in a possible sign of differences between the cofounders of the single currency.

Ministers from the 16 nations that share the euro met to approve arrangements to allow a Special Purpose Vehicle to raise up to 440 billion euros to lend to euro zone nations that run into Greek-style payments problems.

I am confident we will have an agreement today on the SPV, European Economic and Monetary Affairs Commissioner Olli Rehn told reporters on arriving for the meeting.

He said ministers would also discuss the fiscal exit strategy (from economic stimulus measures) because it is evident that many countries need to accelerate fiscal consolidation.

Outside the euro zone, British Prime Minister David Cameron told Britons the scale of the country's budget problems was even worse than he had anticipated and Greece's debt crisis showed the perils facing governments that fail to act.

Greece stands as a warning of what happens to countries that lose their credibility or whose governments pretend that difficult decisions can somehow be avoided, Cameron said.

Hungary's new center-right rulers, who spooked markets last week with loose talk of the country facing a Greek-style crisis, tried to reassure investors Monday by pledging to stick to deficit cutting targets their predecessors agreed with the IMF.

Jean-Claude Juncker, chairman of the euro zone finance ministers, told reporters: I do not see any problem at all with Hungary. I only see the problem that politicians from Hungary talk too much.

The ministers were also due to discuss ways of tightening surveillance of national budgets and applying earlier and tougher sanctions against countries that breach EU deficit limits or misrepresent their statistics, as Greece did.

Investors fled peripheral euro zone government stocks and bonds last week on doubts about how the euro rescue mechanism would work and worries about the solvency of European banks exposed to the sovereign debt crisis.

EURO WEAK

Concern about political stability in Spain, the biggest of the troubled southern euro zone economies, stoked market anxiety.

Spain's 5-year government bond yield was back near the 3.91 percent peak it hit immediately before the euro zone's deal last month on a $1 trillion backstop arrangement for the single currency area and before the European Central Bank began buying government bonds.

The single currency traded close to its lowest level in 4 years below $1.20 after plunging last Friday, partly in reaction to comments from French Prime Minister Francois Fillon welcoming the single currency's weakening against the dollar.

Juncker and Rehn both said they were more concerned by the pace of the euro's decline than by the lower exchange rate.

ECB President Jean-Claude Trichet said Saturday that European authorities were close to completing new stress tests on the banking system and would make appropriate communication once that was done.

However, it was not clear whether this would involve testing individual banks and recommending which ones need fresh capital as advocated by U.S. Treasury Secretary Timothy Geithner in a letter to G20 colleagues published at the weekend.

The euro zone ministers regular monthly meeting has taken on extra significance because of the market turmoil and pressure from Germany, the biggest European economy, for sharp public spending cuts to clean up debt-laden public finances.

In Berlin, Merkel's cabinet agreed to pursue savings of 30 billion euros over the next four years in welfare, mainly from unemployment benefits, and to slash thousands of federal government jobs.

On the revenue side, the German government wants to raise an extra 2.3 billion euros per year by taxing the profits of nuclear power station operators and introducing an environmental tax on domestic air travel.

Merkel resisted calls by some members of her conservative party for an increase in certain value-added tax (VAT) rates, a step she had definitively ruled out during last year's election campaign.

The new savings are unlikely to please some of Germany's partners, including the United States, which pressured Berlin at a G20 meeting in Busan, South Korea, to take steps to stimulate domestic demand and help the global recovery.

Merkel and Sarkozy had been due to patch up their differences over the euro zone and financial regulation at a private dinner in Berlin, 10 days before a crucial EU summit on reforming the bloc's economic governance.

That meeting will now take place next Monday, the German government said.

Sarkozy has refrained from public criticism of Merkel during the Greek crisis, although French officials have been privately critical of her procrastination, which they contend increased the cost of the Greek bailout.

Although Hungary is not in the euro zone, the risk of financial turmoil in wider EU countries is one of the factors weighing on confidence in the euro and in euro zone banks which have substantial exposure to central and eastern Europe.

(additional reporting by Krisztina Than in Budapest, Matthias Sobolewski and Dave Graham in Berlin, George Matlock in London; writing by Paul Taylor; editing by Noah Barkin)