ECB's Lagarde rejects French far-left leader's debt-cancellation plan as 'financially dangerous'

BERLIN, Sept 10 (Reuters) - European Central Bank President Christine Lagarde on Thursday rejected French far-left leader Jean-Luc Mélenchon's plan to cancel a portion of France's national debt, calling it "financially dangerous" and legally impossible under EU law.

Mélenchon has proposed cancelling 18% of France's debt, which he says is held by the Bank of France, arguing the move would free up fiscal space for social spending as France's debt burden tops 116% of the country's economic output.

Asked directly about the idea, Lagarde said creditors would punish such a move. Comparing public debt to a personal loan, she said if a borrower refused to repay and then sought new financing, "I'm not going to finance you," adding she would instead "significantly increase the interest rate" charged.

"Really not a good idea and a large waste of time, however popular that could be in any member state in the euro area," she said at the ECB's regular press conference after raising interest rates.

Lagarde, who is herself a former French economy and finance minister, also said debt cancellation is barred under Article 123 of the Treaty on the Functioning of the European Union — one of the European Union's founding treaties.

She called the treaty "a pillar of stability" and said that any effort to circumvent debt financing rules "would be a pure violation of the treaty".

(Writing by Hugh LawsonEditing by Peter Graff)