European finance ministers on Thursday sought agreement on how to use the bloc's permanent bailout fund to rescue banks from failure, a long-promised goal to stabilize the bloc's financial system.
Enabling the 500 billion euro rescue fund to shore up struggling banks directly is a pillar of Europe's so-called banking union, which seeks to hand European institutions the job of supervision and rescue rather than leaving weaker member states to fend for themselves.
But concerns are mounting that only the broadest political principles for bank rescue will be decided Thursday — and anything that may be agreed will be a watered-down version of the original plans.
At their meeting in Luxembourg, the ministers from the European Union's 17 countries that use the euro were expected to sign off on "the main features" of the guidelines for direct bank recapitalizations, said France's Finance Minister Pierre Moscovici on his way into the meeting.
His German counterpart Wolfgang Schaeuble called the banking union "an important element in creating more trust in the European banking sector."
He and others cautioned, however, that despite the expectation of a political agreement on the broad strokes, many operational details have yet to be hammered out.
The policy was announced by EU leaders a year ago at the height of the eurozone's three-year-old debt crisis. However, some countries, led by financial heavyweight Germany, have since sought to slow down the project and limit its scope. They fear that they might have to spend their taxpayers' money to rescue ailing banks in countries which didn't oversee the sector properly in the first place.
According to draft guidelines obtained by The Associated Press, the rescue fund — the European Stability Mechanism— would only intervene to shore up banks if an ailing institute threatens the eurozone's financial stability and if the bank's host nation is unable to provide sufficient funds.
Some analysts say that solution isn't bold enough since it still requires countries to find the money to rescue their banks except under the most exceptional circumstances. This dilutes the initial idea of the banking union: ensuring that ailing banks don't wreck a nation's finances to the point that it might be forced to seek a bailout itself, as in the case of Ireland or Cyprus.
The ESM's firepower to recapitalize banks will also be very limited to maintain the fund's top-notch credit rating, which it needs to raise money on the international bond markets. Lending to banks that have lost market access is considered to be significantly riskier than lending to governments — for which it was initially set up as backstop — and so would hurt the ESM's credit rating. The maximum lending capacity will therefore range from 50 billion euros to 70 billion euros, according to the document.
Moreover, direct recapitalizations by the ESM won't be possible in the near future. According to the document, a precondition of the ESM rescues is the full establishment of a joint European banking supervisor anchored at the ECB, which won't be operational before late next year.
Germany and France insisted last month that the operational criteria for direct bank recapitalizations can't be finalized before an agreement on two other pillars of the banking union will be reached. One of them, a set of rules on how to unwind banks, including a clear pecking order of who will be hit in case of bank failures, will be discussed by a meeting of the EU's 27 finance ministers Friday. The second precondition is an agreement on a Europe-wide joint deposit guarantee — a discussion that has barely started.
Another sticking point is to what extent the ESM would also intervene to help ailing banks whose problems stem from before the planned ECB takeover over as supervisor. Ireland, Spain and others hope that will be possible, but the main creditor nations remain opposed to the idea.
"I don't think that we have much leeway for direct bank recapitalizations when we have it one day ... to use it retroactively. The ESM's (lending) capacity is limited," said Schaeuble.
The minister also reiterated Germany's conviction that comfortable European rescue nets might lead to moral hazard, meaning EU countries could be tempted to load their problems on the region's authorities instead of dealing with them themselves.
"For those in charge, it is often a temptation not to do what they have to do," Schaeuble said, defending Germany's cautious approach on the issue. "That is often uncomfortable, but it must be," he said.
The ministers were also set to take stock of the progress in Greece and Cyprus, both of which have received bailouts by their European partners and the International Monetary Fund.
They also gave the final approval to a set of rules that requires EU banks to hold more capital to better withstand shocks from next year on. The rules — the internationally agreed Basel III regulations — were adopted with qualified majority. Only Britain voted against them since they were tied to a law that caps bonuses bankers can receive that London opposes.
In addition, the finance chiefs were expected to sign off on Latvia's bid to become the currency union's 18th member nation starting next year — a decision that will then have to be rubber-stamped by a summit of EU leaders next week .europe online
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