As finance ministers gathered in Brussels to outline plans to deal with banks
still in difficulty, Germany's finance minister hardened his stance on the use
of the bloc's emergency fund, according to people close to the talks.
Ministers had been drafting a joint statement to outline their plan of action
after bank health tests next year to draw a line under the region's financial
crisis.
But sharp divisions emerged between France, which wants a euro zone safety
net, and Germany, which is worried that it will shoulder much of the burden if
weak countries turn to the bloc's emergency fund.
Many consider a euro zone backstop central to building a banking union to
avoid a repeat of events in Ireland, which required a sovereign bailout when it
buckled under the weight of its banks' debts.
Earlier this year, euro zone countries agreed that their rescue fund, the
European Stability Mechanism, could provide direct assistance to banks, not just
indirectly by lending to governments.
This is a key demand of some of Europe's biggest countries - France, Italy
and Spain. On Thursday, Germany called that into question.
Ahead of the meeting, French Finance Minister Pierre Moscovici told
reporters: "France continues to believe that we ... must not exclude direct
recapitalisation by the European Stability Mechanism as a last resort."
Speaking just yards away, however, Wolfgang Schäuble, Germany's finance
minister, poured cold water on the idea.
"The German legal position rules it out now," said Schäuble. "That's well
known. I don't know if everyone has registered that."
Inside the meeting room, people close to the talks said the two clashed
again, when Germany asked for the removal of any reference to ESM bank aid from
the ministers' statement. He was challenged by Moscovici, who was backed by
Spain's Economy Minister Luis de Guindos.
The statement is due to be made on Friday.
Coming clean...
The dispute comes at a delicate moment in Europe's early economic recovery
and could yet stymie the banking union reforms.
Ireland and Spain, which both required international emergency aid to tackle
their banking problems, will end those programmes in the coming weeks.
But bank health checks next year - by the European Central Bank and then by
regulators across the wider European Union - could upset this fragile picture as
they are likely to reveal losses on loans and capital holes at banks.
By explaining how the clean-up will be paid for, ministers had hoped to
reassure investors that they are finally ready to come clean on the bank
problems that have dogged them for more than half a decade.
But their promise to stand ready with national backstops will be a hollow one
if it is unclear how countries who are too weak to prop up their banks alone can
be helped.
A new pan-euro zone fund to pay for the costs of closing down or salvaging
weak banks was intended to address this but Germany also made clear on Thursday
that it did not want the ESM to lend to any such fund.
"We are very clear that we don't want a mutualisation of bank risks," one
German government official said, adding that talks between political parties in
Berlin to form the next government meant that Schäuble had yet to receive a
final mandate for negotiations.
Banking union, Europe's most ambitious reform since the start of the euro
currency, would see the ECB policing lenders and should ultimately form a united
front across the euro zone to back ailing banks or close them down.
But the path to completing it is strewn with obstacles, and time is running
out for the ministers to strike agreement by their self-imposed deadline of the
end of the year. One of the most sensitive questions is how to deal with banks
so badly wounded that they need to be closed.
"We won't put a knife to our throats," said Moscovici. "It's unlikely we will
reach agreement tomorrow."
The first pillar of banking union will see the ECB take on the supervision of
big banks towards the end of next year.
In tandem, it will conduct a review of their balance sheets. Rating agency
Standard & Poor's believes that the bank capital shortfall in the euro zone
may total slightly more than 1 per cent of the region's economic output, or
about 95 billion euros.
Before such a test result can be announced, the question of who pays for the
costs of salvaging weak banks or shutting those not worth saving must be
answered.
Any state help will come at a heavy cost by imposing losses on shareholders
and junior bondholders. In time, possibly as soon as 2015, senior bondholders
and even depositors with more than 100,000 euros will be forced to take
losses.
