Stress tests and rescue fund on EU ministers' hefty agenda

BRUSSELS (Reuters) - European Union finance ministers will try to agree the fine points of bank stress tests when they meet next week and break a deadlock in talks on new financial supervisors, EU diplomats and officials said.

Meeting on Monday and Tuesday, they will also press Slovakia to stop balking at signing an accord needed to launch a 440 billion euro ($554 billion) support mechanism for euro zone countries in financial trouble.

The euro zone's 16 finance ministers, whose meeting will be followed by the gathering of all 27 European Union finance chiefs, will also try to push on with negotiations over stricter budget discipline rules so they can take effect next year.

"Stress tests will be a major point in the discussions. It will be a follow-up to the presentation of CEBS," said an EU source, referring to the Committee of European Banking Supervisors, which on Wednesday published broad guidelines on how the bank health check-ups will be carried out.

CEBS' statement lacked some important details, for example the scale of write-downs for banks holding sovereign debt deemed not entirely secure. It will be the last full finance ministers' meeting before the stress test results are published on July 23.

"The ministers will also discuss policy responses by countries where stress tests show pockets of vulnerability, if this is indeed the case," the source said.

Countries should in general have sufficient national funds to recapitalize weaker banks, but some may want to turn to special EU rescue funds set up this year to help governments withstand the turbulence in sovereign debt markets.

"Turning to those funds would require strict conditionality and negotiations with the European Commission," the source said.

The funds include a 60 billion euro facility guaranteed by the EU budget, which is operational, and the 440 billion euro mechanism, which will be ready when all 16 euro zone countries sign a relevant framework agreement.

Euro zone newcomer Slovakia's government, formed after an election last month, has doubts over signing the agreement and the country's Finance Minister Ivan Miklos will face pressure from his 15 euro zone partners to approve it.

"We expect Slovakia to make an announcement that will allow us to make the vehicle operational," the source said.

Miklos has told Reuters that all options are open.

FINACIAL SUPERVISION, BUDGET DISCIPLINE

In what is shaping up to be a pivotal meeting, EU ministers will also seek ways to break the deadlock in negotiations with the European Parliament on a sweeping reform of financial supervision so the assembly can approve it in September.

Creating EU supervisors to keep tabs on banks, insurance companies and financial markets is key to the bloc's efforts to prevent new crises. Delays have been embarrassing as Washington accelerates its own financial rule changes.

Negotiations broke down this week as lawmakers sought more powers for pan-EU bodies than was palatable for some governments, especially Britain.

"The idea is to give a wider mandate for the Belgian presidency so it can reach a deal with the parliament," the source said. Belgium has the EU presidency until December 31, 2010.

The ministers will also discuss recent proposals from the EU's executive arm to use the hard lessons of the debt crisis to sharpen budget discipline in the 27-nation bloc.

The plan includes new sanctions for countries which breach the EU's budget deficit cap of 3 percent of economic output and those which persistently fail to cut high public debt.

Under the proposal, EU countries would submit general budget outlines to the Commission and finance ministers for the following year. The Commission and the ministers would assess the plans and issue guidelines for the country to follow.

The Commission hopes for a quick agreement on the plan so it can propose legislation in September.

Finally, the minister are expected to rubber-stamp new rules that would put a cap on cash bonuses to bankers.

(Editing by Ruth Pitchford)